I!1'C[F&!) POSTAL RATE Commlsston WASHINGTON, DC

BEFORE THE i!1‘C[f&!) POSTAL RATE COMMlSStON ‘(3 Ii WASHINGTON, DC. 20266~661 5 2J, p/j 90, pw:,I fi,\iE c”, OFFICEOF r//C s;hkk,>,,,,

POSTAL RATE AND FEE CHANGES,2001 i Docket No. R2001-1

RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE (OCA/USPS-T&l-21)

The United States Postal Service hereby provides the responses of witness

Tayman to the following interrogatories of the Office of the Consumer Advocate:

OCA/USPS-T6-l-21, filed on October 3,200l.

Each interrogatory is stated verbatim and is followed by the response. Respectfully submitted,

UNITED STATES POSTAL SERVICE

By its attorneys:

Daniel J. Foucheaux, Jr. Chief Counsel, Ratemaking

475 L’Enfant Plaza West, S.W. Washington, D.C. 20260-l 137 (202) 266-2999; Fax -5402 October 17,200l RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCA/USPS-16-l. The following refer to the USPS FY 2001 and FY 2002 Operating Plans. (a) Please provide the FY 2001 Operating Plan and the most current USPS FY 2002 Operating Plan by accounting periods for Postal Service operating revenues, appropriations, investment income, expenses and volumes. 04 For each of the thirteen accounting periods presented in part “a” of this interrogatory, please provide the most current USPS Operating Plan with operating revenues broken out by mail class and subclass cost categories.

RESPONSE:

(a) The FY 2001 Operating Plan by accounting period is attached. The FY 2002 accounting period Operating Plan has not been finalized. However, the FY 2002 Operating Plan for the categories requested is as follows: U.S. Postal Service FY 2002 Operating Plan (Millions) Operating Revenue $66746.8 Appropriations 47.6 Investment Income 29.1 Total Revenue $66823.5 Total Expenses 70‘172.6 Net Loss $ 1,349.l Total Mail Volume 209,939

04 As indicated in response to part (a) above, The FY 2002 accounting period Operating plan has not been finalized. However, the FY 2002 operating revenue by class of mail is as follows: RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

U.S. Postal Service FY 2002 Operating Revenue Plan (Millions)

RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCAIUSPS-T6-2. Please provide the USPS FY 2001 and FY 2002 budgets broken down by accounting period as used in the following schedules and pages of the Financial and Operating Statements filed each accounting period with the Commission. (a) Highlights on page 1. 03 Statement of Income & Expense on page 2. Revenue by Category on page 5A. ;:; Expense Analysis on page 6. (e) Analysis of Operating Expenses on page 7. (0 Analysis of Non-Personnel Expenses on page 8. (9) Work Hours & Overtime/Sick Leave ratios RESPONSE:

(a-g) As indicated in the above question, the information requested has been filed with and is available from the Commission for accounting periods 1 - 12 of FY 2001. The attached provides the requested plan information for accounting period 13, FY 2001. As indicated in response to OCA/lJSPS-TG-1, the FY 2002 accounting period Operating Plan has not been finalized. Available budget information for FY 2002 can be found in the FY 2002 Integrated Financial Plan included in my response to OCAAJSPS-TG-7. Highlights Accounting Period 13, FY 2001 (Millions)

Accounting Period 13 Year&Date

Budget Budget

f 5,149.1 T&al Revwue (I) $ 67,739.6 5179.9 Tobl Expense (2) 66.169.6 $ (-230.0) locomel(Lorr) s (-~.Ol $ 651.9 CaphI CorMbwnb (3) $ qO0.7 121.3 Tobl Work Roun 1,612.0 15$62.2 Mail volum 207,640.l

lldc Tot& may 1101MI dur to mundlnp. Note RDIIVdunw nurnbrn sm pmlknhq numberswd w whjncl to change. (1)TIM mwnw pIa m6acb mba ” nquostad h thr R2oool OmnibusRata Case. Thesemngad 6.4%. Rate8impbnm(cd January 7, 3Nl1 haed 0” Pods1Rste CornmIssion (PRC) dscbbn aveqpd 4.(x. (3)~se4xrplnutbnom~lgl6nkmln9tr~~~~~. (1)TIM Upw plm w mducad tmm 63.6hlllb~~ to 62.6blllbn.

Current Last Actual Number of: Period Period SPLY

post Gtttcea Actlvr Posbl Gwned Vehicbs AdminhlnUve opmtion* Polslbb city D4livefies (000) City Getivmy Roub4 Runl Roubn C~mef Employeea (Excludes Inspector General) Cwurl Employeea Tranriibnrl Employees Statement of Income & Expense Accounting Period 13, FY 2001 (f Millions)

Current Period Year-to-Date

Budset Budget

t 5147.0 Operating Revenue * s 67,712.5

S.22T.4 Operating Expense 99.135.5

$ (-90.4) Income (Loss) From Operations S 1,577.0

2.1 Investment Income 27.1

- 29.6 Interest Expense .423.l

- 123.9 Interest on Deferred Ret. Liabilities - 1,611.O

s (-230.8) Incomsl(Loss) s (-430.0)

[ ]=Unfavorable variance to budget Note: Totals may not sum due to rounding.

l The revenue plan reflects rates as requested in the R2900-1Omnibus Rate Case.

-2- - - - _-^ ..-. -.-_-- REVENUE BY CATEGORY Accounting Period 13, FY 2001 (S Millions)

current Period Year-to-Date Budget I Budget i Commercial Revenue t 2.363.0 Permit Revenue 3 m60.9

1.514.4 Other CommendI Accounts Revenue 21.369.2 $ 3,696.Z Total CommercialRevenue $ 59,439.l

Retail Revenue 970.5 Retail Postage Revenue 13.719.1

114.6 Retail Servkes Revenus 991.7

0.9 Retail Prcducts Revenue 125.1

125.6 Other Retail Channels Revenue 1.7054 ) 1.227.6 Total Ratail Revenue ) 16,621.3

$ 5,126.0 Total Commercial(L Retail Revenue $ 67,059.4

15.9 olherlnccNne 566.4

5.1 Revenue Forgone 66.7

$ 5,147.0 Total Operating Revenue $ 67,712.5

2.1 Investment lnwne 27.1

s 5.mL Total Revenue l

[ ]=Unfavorablevariance to budget Note: Totals may not sum due to rounding. l The mvenue plan reflects rates as requested In the R2tW-1 Omnibus Rate Case. -SA-

. . - ._ .- ^. ~ .- ~~ - EXPENSE ANALYSIS Accounting Period 13, FY 2001 (f Millions)

currentPerfod Year-to-Date

Budget Budgs4

S 3,904.2 PerecnnelCompensation s 51.594.4

374.6 Transporlation 4,825.g

. 345.2 suppfii EL6ervices 3,432.0

693.4 olhel 6293.2

3 1.323.2 Subtotal 3 14551.1

$ 5227.4 Total OperatingExpense $ 66,135.5

26.6 InterestExpense 423.1

Intereston DeferredRet. Liabiliks 1.611.0

Total Expense

]=Unfavorabfevariance to budget Rote: Totefs may not sum due to rounding.

* In Fiscal Year (FY) 2001. the Postal Service began accruing for the cost of holiday transportation when incurred. rather than recognizing the expense when paid. The impact of this change in accounting policy is to increase the reportad growth in AP 4 transportation expanses by 5137 million, relative to the same period last year (SPLY). Future accounting periods in FY 2001 will also be less comparable to the prior year, as the reported growth will be slightty tower than it otherwise would have been, compared to SPLY. -a-

ANALYSISOF NON-PERSONNELEXPENSES Accounting Period 13, FY 2001 (I Milliins)

Year-to-Oste

s 314.6 TmlXpOMiM s 4.8259 345.2 SUp+4ii&Sl3Wk?S 3,432.0 180.2 - 2.272.9 78.0 Rent 911.0 67.0 Fual&uNities 503.0 30.3 Rurd caniar Equip hint Atbwance 390.3 38.1 vahi&Mantanance 414.5 57.9 Intomatim Tedwokqy 437.9 42.5 Building PmjecisExpensed 227.5 5.7 cffltrad Job ueaws 70.4 15.4 Travel 6 RekcatW 165.4 30.2 CommUnicatanS 252.5 6.2 conlmd taallons 73.4 4.4 Plinting 43.4 9.8 Trainin 93.5 5.3 Carfare8 Tolls 66.2 3.1 Vahii Him 44.8 3.9 AaTidantcoa 48.2 - 5.0 cqitalizad interest - 65.0 29.6 303.2 $ 1,323.2 Total C+herOpwaUng Expenses $14,551.1 .14.

WORK HOURS ELOVERTIME/SICK LEAVE RATIOS Accounting Period 13, FY 2001 (Data in Thousands) cutTerlt Period Year-to-Date

Budget Total Work Howe Budget operations: 770 .iUppOlt 10,225 30,007 -Mail Processing 411,529 13,311 -Rural Deiivery 173,295 36,- ather Delivery 463,910 2507 .Vehiclea 6elvicea 33,657 6,455 -plant 6 Equip Maird 85,437 19,340 -Customer Services 260,726 766 Controller 10,136 754 Human Resources 9,998 1,009 Customer 6ervice ELSales 14,343 5,141 Administration 67,037 4,667 Dther 51,701 121,260 Total Work Houn 1,611,999

Oveftima Budget I I Budget oveftima Ratio 8.0% Per 100 Work Howe 8.1%

Sick Leave Budget t Budget I I Sick Leave Ratlo Per 100Work Houn

1 )=Unfavorablevariance to budget

l RecastedData Note: Totals may not sum due to rounding.

^_.. ^... ^ ,,,..,. “^ .- RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCANSPS-TG-3. Please provide the Postal Service’s FY 2001 and FY 2002 annual Capital investment Plan similar to the Capital investment Plans for FY 1999 and FY 2000 included in the record of Docket No. R2000-1 at Tr. 2/409-15. Also, please provide any updates to the FY 2001 and FY 2001 annual Capital investment plans.

RESPONSE:

Please see my response lo OCAfUSPS-TG-7 for copies of the FY 2001 and 2002 capital investment plan included in the integrated Financial Plan for each of these years. Please note that page 7 of the FY 2002 integrated Financial Plan reflects the revised FY 2001 Capital investment Plan that was reduced from $3.6 billion lo $1.6 billion. The FY 2002 capital plan was reduced from $3.7 billion to $2.4 billion. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCAIUSPS-T64. Please provide the Postal Services current five year capital plan and any updates for FY 2001 and FY 2002, if any, to the Postal Service’s current five year capital plan similar to the FY 1999 update to the FY 1996-2002 Capital Investment Plan included in the record of Docket No. R2000-1 at Tr. 2/416-427.

RESPONSE:

Attached is the last approved five-year capital investment plan (FY 2001-2005). This plan does not reflect the FY 2001-2002 reductions referenced in my response to OCAIUSPS-TG-3. A-ITACHMENT OCAJUSPS-T6-4 UNITED STATES POSTAL SERVICEm Fiscal Year 2000 Results

During auarter 2 the Fiscal Year 2000 capital plan was adjusted-from $4 billionto $3.5 billion. he capital plan for Fiscal 92 percent of the final planned Year 2000 had four major amount for Fiil Year 2000. The T goals, to improve the quali- fml year began with a corporate ty of customer service; allow for capital plan of $3.9 billion. aggressive cost management; However, at midyear an ongoing increase productivity gains business reassessment cmss-func- through technology; and, maintain tional team recommended that the infrastructure. The folIowing plan be reduced by $550 million, table lists the primary capital most of this reduction came fmm projects committed in Fiscal Year the facility budget. At the end of I minimum infrastructure 2ooo in support of the four goals, the fiscal year. the new capital representing approximately 50 plan was approximately 33.5 bil- investment for expansion pement of the total capital com- lion with the total year-end to of the delivery network, mitments for the year. date capital commitments equal- while emphasizing high- : The total capital commit- ing $3.2 billion. er return investments. / ment of funds was approximately The Board will review this each year as further

business trends unfold. l

Richard J. SVasser. Jr. Chief Financial Omcer Executive VI Pt-bzbnt The “other” category includes capital commitments support investment3 in information sys- the planned emphasis on equip. tems, retail equipment, cus- ment and infrastructure pmj- tomer support systems and new ects. For the pmnt and the products and services. The future, the resulta of the Fiscal Board also approved a total of Year 2000 capital investments $1.606 billion for 20 new major yields the outcomes expected capital investment pmjects. fmm the objectives set for he major categories of Postal Service’s capital plan. capital investment and The e&ctiveness of the overall T the actual commitments capital plan is unequivocal for Fii Year 2000 are dis- The impmvementa in opera- played in the table above. tions show record setting per- Except for retail equipment, formances in service and pm- each of the categories of invest- ductivity. Clearly, the actual ment declined from the previous year’s levels. The increase in the retail equipment category is ; -+ attributed to the continued successful deployment of the Point of Service (POS) One terminals to post offices throughout the country

During FY 2000, the capital plan was adjusted fmm $4 billion to $3.5 billion. However, this was the fifth consecutive year that we have had capital commitments of over $3 billion. During 2000, we completed 9 Board appmvad pmjecta totaling mom than $571 million. Of these 9 projects, 7 - were equipment pmjecta, 1 was a facility project, and 1 was classified as an “other” pmject.

2 FY 2001-05 Capital Plan

The Fiscal Years 2001-2005 capita2 plan totals $17.5 billion. FY 2001 portion is $3.6 billion. -

his is the fast five-year ment efforts, technology will be capital plan since 1998. used for automation and mod- T For illustrative purpos- ernization projects a&c&g es, the total capital plan is distribution. processing, and divided into the seven cate- delivery operations. The capi- gories shown below. The tal investment plan alao amounts and the percentages includes programs that will down the sides of this pyramid improve the quality of cus- roughly represent each catego- tomer services and facilitate ry’s portion of the total plan for revenue growth. Concurrently, FY’s 2001 and 2001-2005. infrastructure investments are Aa shown below, signifi- necessary to sustain opera- return-on-i~vestmen.I cant capital investments of $3.6 tional changes resulting from projects,specifically the billion in FY 2001 and $1’7.5 workload growth. This effort cl&ml&d flatssorting billion across five years will includes the repair or replace- machine (AFS~ 100s influence future operating ondthei%neand ment of aging assets and pro- Attendance Gmhl results. To aid cost manage- viding * modem information System (ZAGS), as well 0s muintuiri our infm- structure and accommodate growth through ow f&ides, L&icks, and information systemS;pluS e&ore and prepare for opportunities in the e-environment.” technology network and infra- financial and operating goals capital investment opportuni- structure. The investment were achieved. ties will produce a return on strategy is designed to achieve The FY 2001-2005 investment greater than the continuous year-to-year per- Capital Investment Plan cost of borrowing capital funds. formance improvements. To reflects the Postal Service’s ‘For the purpose of minimize future borrowing focus on high return on invest- illustration each pmject within requirements, projects in the ment and infrastructure pmj- the capital plan has been clas- FY 2001- 2005 Capital invest- ecta. The strategy illustrates sified into one of the following ment plan will be funded inter- the importance of committing categories: Equipment, nally to the maximum extent resources toward revenue gen- Facilities, Infrastructure, possible. The Postal Service erating activities, as well as Vehicles, Retail, eBusiness, bylaws require that the capital funding our eBusiness initia- and Research & Development. budget be submitted to the tives, technological infrastruc- Board of Governors for tures, and information plat- spproval each year. The Board form projects. We estimate approval signifies general con- that our current portfolio of xrrence with the plan. Projects greater than $10 million are individually presented to the Board for approval. Development of the plan is only the beginning of the capital investment process. Each major pmject within the plan will be subjected to a vig- emus review, validation and approval process, designed to ensure the pmject is properly iustitied. Anticipated results are documented and return on investment methodology analyzed to ensure accurate pm- jections. Operating budgets are reduced to reflect those investments based on cost savings. Studies are performed on selected major project following implementation to determine if Automated Flat Sorting Machine

4 EQUIPMENT PROJECTS

he total equipment cate- nization investments to enhance gory comprises $1.3 bil- previously deployed technologies T lion of the FY 2001 capi- and expand the technology base tal plan. The capital resources available to support postal oper- dedicated to equipment technolo- ations. While most of these gy escalates in the coming years investments are directly target- to a total of $7.4 billion, which is ed at controlling costs, many will 42 percent of the Fy 2001-2005 also contribute to impmvements plan. This investment strategy in service quality and ease-of-use will continue to be a key goals. enabling element for the achievement of future perform- Below is a list of the major ante targets. Equipment con- equipment pmjecta in the five sir&s of automation and mecha- year capital plan.

Subcategory Project Name

Panal Nsxl Gsn smstl ParcelBundle sorter Letters Mut&lineOptical Charactec Reader Replxement MatedalHandling RobottcsContainer Loader other InfomWionBased lndii PostageCamera Letters DeiivetyBarcode Sorter Expanded Capability h!atet%alHandling FieldMaterial Handling Systems MatertalHandling AutomatedAirline Assgnmsnt System Lettws’ 24-Dgll Tray Label MaterialHandling Auto Tray &aver Parcel Upgrade/ReplaceParcal Sorting Machine Parcel ParcelSingulatwfhmnel other Mail ItemRetreivat System Lettex HIPXI00 (RemateGxnp Read) Flats NewFlat Wtng Machine MaterialHandling W SP@= support Letters RemoteComputer Reader Letters FastfoiWald me-r NewEquipmant Memods olhar Recognittwlmprvmnt other Intellii DeliveryUnit-Mail Itsm Ret&al System Parcel SmallParcal Bundle Sorter Ph II Letters CanierSequence Barcode Sorter Bulky h4od MaterialHandling commlxlal Diibibunon Letters CarrierSequence Barcode Sorter 21125 Stacker Upgrade Letters CanierSequence Barcode Sorter Optical Character Reader

5 EQUIPMENT CATEGORIES

dation for unit load tracking. The AUhlatic Airliw PY 2001 capital funding Assignment (AM) and Semi. includes the following pm Autmraiic Scan where You gralUS: Bond GSASWYB) System hm teen developed to replace the The Robotic Containcria~riw, continuous flow system, which

Loader System supports t 1~ has been discontinued. The acquisition of 1M) robots tl, SASWYB system processes automatically unload ICI u-r sacks, pouches, outsides, trays mail trays and flat tubs out of and tubs. It provides a semi- mail containers. quipment programs automatic means of processing are segregated into the andazkgningalltypes ofmail E following sub cate- to aidine flights. gories based on the type of mail tobepmcessed. Field Material Handling Systems wver continuing field MATERIAL mail processing projects that HANDLING support material handling SYS- (FY 2001 plan $401 million. terns in mail processing centers Five-Year plan $2.5 billion.) These projects address the rlcbtic caa~riu~t, lLa&r 8. .,,.,,, safety concerns of the Postal These systems wiU replaw ,wr. The emphasis in this area will Service and will improve effi- rent labor intensive oper:ui,~z be on the robotics and automat- ciency by increasing productiy- with automation Thii will 1~. ed tray-handling programs ity while providing for better implemented in the openiui: designed to support the expect- service. unit and container breakA*\~i, ed change in mail mix and off- operations of mail procesz~ug set growing materid handling PARCEL Centers. Upon full deplo? labor costs The material han- DISTRIBUTION ment, * significant reduct irw in dung plan CalIs for linking (FY 2001 plan $364 million. mail handler workhours iz work units within a plant and Five-Year plan $1.3 billion.) expected. automating allied labor functions. The material handling Over the next several years. plan is intended to integrate parcel-sorting capacity will bc processing across all product expanded and investments in lines. It will provide the foun- technology will be made to improve the performance of the

6 equipment. The following programs are included in the capi- sorter and will reduce mail tal plan: processing labor w four keying positions per tour. The Neti Generation Pared/Bundle sorter channels multiple streams of parcels LETTER into * single line in * process DISTRIBUTION known BSsingulation. The ZIP (FY 2001 plan $354 million. code/barwdes are read with Five-Year plan $1.7 billion.) optical character reader tech- The Upgm&/Re&cs Parcel nology or remote keying is Sorting Machine/Sack Sorting The optical character reading, used to automatically assign Machine program’s objective is barcode sortii. and remote parcels and bundles to .the to investigate and evaluate ending technology required appropriate separation. This state-of-the-art equipment ded- to automate letter piece distri- machine will be capable of icated to the sorting of parcels bution is now deployed. By the assigning over 11,000 parcels and sacks. These new tech- end of FY 2001, a number of per hour onto the sorter and nologies will provide innova- key programs will have been wiU reduce mail processing tive approaches to improve sort implemented to further labor by 50 percent from the capacity, efficiency and relia- enhance the capability of this ! present small parcel and bun- bility in the 21 BMC’s. that equipment and expand the dle sorter currently use 30 year-old tech- capacity of the system. The operation. nology, which is becoming following letter distribution increasingly more difticuh to programs are included in the maintain. The new improved FY 2001 capital plan: sorters will offer greater sort accuracy and reliability. The Multi-Line O&al Characler Reader Replacement The BMC Sin&a&w Scan program cdl6 for the acquisi- Induction Unit is an automat- tion of 600 Delivery Bar Code ed parcel singulation and Sorter Input’Output Sub- induction system that singu- System kits and 100 Delivery lates a bulk mail stream of Bar Code sorting machines to parcels, reads their barcodes. replace 875 out-mcded multi- and assigns them onto the sec- line optical character readers. ondary parcel sorter in the This program will involve the BMC’s. This machine will be manufacture and installation capable of assigning over 5,000 of the equipment as well as the

7 removal and disposition of the CUSTOMER AND ly track approximately 40 psr- multi-line devices. The program OTHER cent more of the mail than cur- will provide all logistical support EQUIPMENT rent capabilities. -- elements such as spare parts (FY 2001 plan $175 million. and training. Five-Year plan $789 million.1 Equipment Performance Improwment is for the mainte- 7k.e Deliwry Barcode Sorter This category includes customer nance and enhancement of exist- Evaded Capability program ing equipment. The programs deploys 1,000 expanded capabii- cover the entire inventory of ty modification kits to he automation and mechanization installed on delivery bar code currently deployed and being sorter machines at 250 sites. deployed. Examples of the sup- This wilI enable the delivery port programs include barcode sorters to handle the testing/fielding/training for the majority of mail that is current- Flat Sorting Machine IO0 and ly being sorted manually. training for occupational health service equipment programs and safety issues. designed to enhance Postal Service products, and equipment The Mail Itmn Retrieval System The Remote Computer Reader that supports multiple equip- is a service enhancement con- 2000 program enhances the ment categories and non-fmed cept for automating the track- address recognition technology automation and mechanization ing, storage, and retrieval of used in the Remote Computer projects. The following programs mail items that have been Reader that targets a 10 percent are included: brought back to a delivery unit improvement in handwritten by carriers, i.e. undelivered mail address recognition. while meet- The Information Based Indicia items. The Mail Item Retrieval ing existing throughput’and (IBI) Postage Camera System utilizes two primary error rata requirements. The Replacement equips automated components: a computerized upgrade is part of a continuing, facer cancelers. optical character service and monitoring system highly successful effort to reduce readers. and barcode sorters that provides information on mail processing costs. The with cameras of sufllcient reso- undelivered mail items and an encode rate improvement soft- lution to read the IBI postage automated secure storage and ware reduces the number of codes. This makes tracking retrieval carousel. manually keyed addresses, information available in-house thereby providing substantial and to the customer. The ability cost savings and improved pm- to read the IBI postal code is ductivity. necessary to meet customer requirements and can potential-

8 FLATS The Advanced Flor Sorting replace the existing 812 F’lat DISTRIBUTION Support hgram is the Postal Sorting Machines--(model 881). (FY 2001 plan $23 million. Five- Service’s three phased approach The Phase III purchase consists Year plan $1.1 billion.) to automating flat mail process- of about 575 machines to deliv- ing. The Phase I purchase of ery point sequence the nation’s Flats distribution technology 175 Automated Plat Sorting flata. The system features will be improved and capacity Machines provides the field sites include on-line video coding, an will be expanded in PY 2001 with additional processing optical character reader, three and beyond. The major portion capacity. The deployment is automatic feeders, tray tal;e- of the flats program involves fiat scheduled from March through away conveyors and a thmugh- sating machines. December 2000. Phase II is an put of over 17,000 flats per additional purchase of approxi- hour. mately 400 unita that will FACILITIES Corralee, New Mexico Post OfFice pictured below (Fy2DDl plan $1.1 billion. Five-Year plan $5.6 billion) This is the first sbaw bale post office he facility investment decisions are no longer “business as in the United states. The old fash- usual”. ks the mail mix changes, repair and alteration and ioned technique of using bales of T expansion projects are emphasized over new construction to straw as insulation between support maintain our valuable assets. The Postal Service seeks to optimize the beams was combined with the latest uss of space currently available. The criteria for determining whether energy conservation systems and tc lease or build postal owned f&lit&s willbe reviewed. In some areas recycled materials. The result is a with multiple facilities, sites may be considered for consolidation or ‘green.’ resource-efficient building used Merently as mail volume begins to decline. that I% the rural charaoter and Western environment of the Corrales. Below is a list of the major processing facility loca$iona in the New Mexico community. five year capital plan.

CHARLOTTEP6DF CINCINNATIw3c HOUSTONAMC INDlANAPOLI P6DC MILWAUKEEP6DC NORTHEASTMETRO P6DC PORTLANDP6DC SANANTONIO P6DF ANNEX SEAmE P6oC RLLA WESTERNCT P6DC BRONXGPO NJMETROP6DC OKLAHOMACITY P6DF PHOENIXAM STATENISLAND P6DC AJBUCUERQUEP6DC ONTARIOAMC BOSTONAMC BRONXLASALLE GREENVILLEP6DC RICHMONDP6DC PHILADELPHIAP6DC NC0 6 RENC TIONS 0 acccmmodata growth, there will continue to be ‘T a need for new facilities in high growth (was and corn- munities under served by deli? cry and retail tkilitias. aspecial- ly in support of the gateway to the houashold strategy for package delivery. However, the need ~ for the new stand-alone fkilitiea ’ must be evaluated against stratagies to provide retail or pickup and return services through alternative means. The facilities commitment plan for PY 2001 is $1.1 billion, which accounta for 30 percent of the total capital plan and includes funding for the following items:

The Major Mail Processing Facilities program funds the planning, site acquisition, and design and construction for plant projecta that cost in excess of $5 million.

The Dcwlopmental Real Estate program focuses on marimiang benefits and generating rev- c enues from Postal Service real property. Activities to accom- Great Falls. VA Main Post OtEce plish this objective include the Location: 10001 Georgetown Pie. Great sale of excess real property, Falls, VA development of underutiiiaed real property. and the acquisi- Building Size: 10.941 Net Sq Ft tion of leased facilities. Deliveries: 6.366

11 The GSA Building Security study entitled “Vulnerability program provides for Assessment of Federal increased security measures Facilities,” was in response to at facilities that house higb- the bombing of the Alfred P. visibility federal tenants, Murrah building in Oklahoma such as: the FBI, Federal City. Approximately 260 Postal Courta, and the Alcohol, Service owned facilities with Tobacco and Firearms federal tenants faU within the Agency. This requirement, scope of this program. as set forth in the Department of Justice @OJ)

Tulsa Oklahoma Proctssing and Distribution Center .* ~ Building Size 362,661 squars feet

Annual Mail Volume (Total Originating and Destinating) approximately 2 million pieces he Infrastnlcturs catego- MAJOR INFRASTRUCTUREPROJECTSIN THE ry comprises capital FY 2001-2005 CAPfTAL PLAN T projects, which provide the day-to-day support equip ment necessary to help employ- Project Name ees perform their work more efficiently and to enhance man- Futun HRIPayrdl HWPayEnterprise agement’s effectiveness. Mltanews RedesignEnabling Pfuass Mscalhneous Employee&sii Prcgtam ‘l%is category includes the new t4MllaneoUS CentralRepair FadMy (Topeka) ML5cetlanKlus. NabanalCantar for Em@oyaeDeva@mentTraining Information Platform subcatego- MiiS NameI TechnicdSupport Natwk ry of projects. The Information MiscallSWS TwoDay lntwnationdExprass Platform group integrates saver- Milaneota Site Mata hlkcellaneous BreakthnwghPmdwtivity lmpmvsment al previously separate are*s into Mtilarmus Cqmete Me&t Research one. “Stove pipe” projects from Deliveryopereths infomdm System Ioformation Systems, Info syslem klfo system Mail Evaluatkm.Readab4ii & Lock up Instrument Engineering, and other sponsor- Info Systems DistributedInfra. Standardiiation ing organizations are consolidat- Info Systems Postalona! SurfaceAir Maint.System ed to encourage the benefits Info systams Info Syslems IntegratedData System from economies of scale and Info Systems Iwciite O&a lnfra5buctura project synergy. Information Info System-s PostalFii Computerlnfra3tructure Info S~tam.5 StandardAcctg Retail Platform will focus on projects Info sptems Time6 AttandamxCollactW Systam that provide a return oo the Info Systems Tima8 Attandance infrastructure investment. tnfo Systems EEOComplaint Tracking Systam Info Systems IntenMonal Systams Information Platform infrastruc- Info Systems Facilii FlowModel Analysis ture projects will emphasize Info Systam5 DaliveryRadasgn improved management tools, Infosystams CorrsJpondence6TransacWs DeliveryConfkmaM ReMpt System using information accessibility. Info Systems Info Systems EntrySchedule Peticdicals The result will be quantifiable Info Platform Processing& Distributicmlnfwmation System savings in labor and other direct Info Platfom, StructuredP!ant wiring CorporateData Mart and indirect costs. Info Platform The plan includes funding for Communications EnhancedStreet PerMwnca the infrastructure and postal Communications TelaphwaEquipmant Installation Information Platform programs listed to the right.

13 The Mailing Eualwtion, The Surface-Air Mmagement able across all plants and Readability and Lookup System will provide an integrat- BMC’S.. Inafrumenf (IUERLZN) program ed transportation system for ia designed to read the address large customers, plants, and air- Postalone! is a three-phase pro- and indicia marks, ve+ meter port mail facilities and centers. gram that will provide business amounts, weigh the mail, check The program will inmrporate all mailers the opportunity to elec- thickness. and perform many transportation planning into one tronically interact with the other mail acceptance and busi- system. Postal Service. The program ness mail entry unit functions. offers information access and This program ia expected to Structured Wiring is a program future electronic links to our improve the consistency of mail for the installation in all plants products and services that fills acceptance and improve address of scalable, comprehensive, the gaps in our ability to com- quality, while supporting rev- state-of-the-art data wiring that municate and serve the business enue protection goals. will support the mail processing community. This project is aLeo equipment and systems on the designed to support our revenue - The Delivery Operations work room floor. It assures the pmtection efiort. Information System (DOIS) is Postal Service of one nationally expected to replace our anti- configured wiring infrastructure quated delivery operations sup that is standard and support- port systems with stata-of-the- art software packages that pmvide delivery unit supervisors with data they need to make solid business decisions in bal- ancing the current daily workload with the available resources. The DOIS pilot suc- cessfully deployed the application to six districts (New Hampshire, Salt Lake City, Sacramento, Erie, Lancaster and Fort Worth). 1 CFY 2901 plan $335 million. Five-Year plan $1.2 billion.)

he primary purpme of I vehic* Projaca includad In nm mn . the vehicle capital pro- yur capital Plan gram is to support ~Anemate Fuel V&ii growth and to replace the mail Mixed Delivery 6 colkction Vehii Lmg Life vehicle .sheMlg transport and delivery vehicles that are past their useful service Altematlve Fuels life. Newer vehicles provide bet- Tt”ck n-actm Cargo Vens 1 ter driver safety, higher fuel Trailers ) e&iency, greater reliability, and lower maintenance costs. Mixed Deliwry and tram this new purchase, will ulti- The PY 2001 capital funding /j Collection Vehicles program mv- a*,~.mstely pmvide an lncread quali- __ pLan for vehicles is $335 million, em the purchase of 2,200 two- . ty and reliability of customer sarv- which represents *bout 9 par- I F ton vehicles. A portion of.the .T ice with more timely deliveries. $2 cant of the plan. The vehicle cat- purchase will replace existing egory includes the following pm- vehicles that have reached max- The Carrier Route Vans program grams: imum service life and the bal- provides for the acquisition of ante will provide for new service 15.395 vehicles, beginning in Fy requirements. 2002 through PY 2005. The vans will replace older vehicles uaad to The cargo Vansprograru pro- support the daily delivery of mail. cures 1,250 cargo vans. which support daily transportation of mail between processing centers. large mailers. and delivery units. These new vehicles will allow the Postal Service to avoid higher operating costsdue to the increased breakdowns of the older vehicles to be replaced. The reduction in vehicle breakdowns, resulting Y - -- -~--- Y 2001 plan $236 million. Five-Year plan $791 million.)

apital investments for Point of Service (PO.9 One. machines use t.wo coil stamp lobby, window, and self- Stage 2B is the third of the four disp&ers tb;lt vend individual Cservice retail equipment phases of the POS program. fV8t-class and/or postcard dance customer service by which was started with Board stamps. Pull deployment to the xpanding the availability and approval of phase one in June field of the 2.0~ machines pur. onvenience of our products and 1996. This phase includes the chased was completed in March enices. Investments in retail planned installation of 13,504 2000. .nd acceptance automation is terminels in 4,615 retail facili- ieaigned to make both processes ties. POS is a sophisticated sys- Tlw Postnl Booklc~t /Stamp sore cost-effwztive. accurate, tem that will replace the aging MOdtines (P&‘M.624B) are ,nd responsive. These changes integrated retail terminals fully equipped with the Meat hould reduce waiting time in (IRTs). POS is a strategic tool software enhwcrments and fee- insa in postal lobbies, and pro- that will implement an informa- ture the new portal branded ide more relevant, helpful tion platform to make technolo- design. These machines uss two nformation to both clerks and gy work for postal management coil stamp disprneers that vend ustomers. Streamlining the and our customers. The final 1 individual fwt-class and/or I lcceptance process saves both phase of POS is included within postcard ~;tamP* and also four he Postal Service and mailers the FY 2001 . 2005 capital plan. ~~i~.+cn~rs dispensers that vend ime and money. Commitments stamp booklets. Full deploy. danned for FY 2001 include the The Self-ServiceVending mcnt to the field of the l.ooO bllowing major programs: Equipment program provides for machincr purchased is expected the purchase of new stamp to be complete by the end of cal- vending machines. The follow- en&1r ?;r;,r 2000. MAJOR RETAIL ing described machines will be capable of communicating with Cofltrwt Postal c&s are an PROJECTS IN THE FIVE f YEAR CAPITAL PLAN an information system for ongoing program. however an reporting debit/credit transac- improvement effort is underw! tion data. and management bawd on lessons learned in thr Point Of Service information to a central site. Midwest and Sou Self Service Vending Equipment theart iweas. Slamp Sefvioe Centers Postal Storup machines (PS- In-aore Messsge Management 228) are fully equipped with the

Money Mover latest software enhancements and feature the new postal Stamp Manufacturing branded design. These Retail Operations

16 rus11 ilARCH (FY 2001 plan $42 million. Five- unattended unit. Year plan $164 million.) P- The goal of eBusiness is to provide new Internet based wad- ucts and services for our cus- (FY 2001 Plan $27 million, Five-Year timers, and to enhance features Plan $56 million.) and access to core postal pmd- Key Research and Development proj- ucta and information about our ecta emphasize research into opera- services. The programs include: tional areas that will lead to reduced .. costs and impmved customer service. The Internet Infraetructure pro- ‘1. !i’; In general, Research and gram includes several projects , Development costs are expensed and designed to get eBusiness off the i’ not capitalized. However, the follow- ground and provide the infra- ing programs have capital funding: structure “backbone” needed to compete in the electronic arena. Automation Support provides software development for the National Mailing Online enables small Directory Support System, which is businesses and other mailers to the offline automation support for use the Internet as a channel to mail processing activities. access information and services related to First-Class and The Flat Bundle Collator program extends the development of a proto- Standard (A) Mail. type flats delivery sequencer for large carrier stations. eBusiness Security will provide a strong security architecture Makrial Handling Robotics supports designed to protect the USPS the technology transfer of commer- networks, platforms, and mis- cial robotics applications into the sion critical electronic business Postal Service environment. applications. Retail Outlet Alternatiws explores Internet Shipping Solutions will the low cost alternatives for provid- offer a suite of shipping tools ing customersconvenient access to that extends existing USPS postal products and services. products. services, and information to the Internet.

17 MAJOR R&D PROJECTS IN THE FY 2001-2005 CAPITAL PLAN ” ‘he PY 2001-2005 capital plan sup- lorta investing to improve quality Automation System COmmUniCatiOn support ustomer service. and encourages Optical Chatactar Reader Recognition Support lggressive cost management. Our Midas Rawrita apital plan 6&a the platform for Vehiola Suppoti mire productivity gaina through Automation support dmology, while mainteining our Morrnatjon Tachonology lnfraatructure R&D ofmstructure. Our five year $17.5 Retail D&at Research (L DWalopmWtt dlion Capital Plan supporta the fol- Mail Handling Robotics Support owing strategies: investment in Flats Bundla Collator ligb return on investment projects automationlmeehanizationlinforma~ ion &atform), and maintenance of w inhstmcture, while accommo- Lating growth. FY 2001 - 2005 lur ability to achieve the commit- CAPITAL PLAN BY aents outlined in the plan will be CATEGORY Ietecmined by future business ($000) rends and will greatly depend upon NWfinancial position over the life of Zategories S-Years his plan. Fquipment 7,415,605

-acilities 5,645,380

Vehicles 1,221,802

nfrastructure 2,232,560

Retail 790,983

R&D 55,645

eBusiness 164,114

Total 97,526,090

18 RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE Of THE CONSUMER ADVOCATE

OCANSPS-TG-5. For each capital program and major program initiative with costs that are included in the FY 2002 interim year and the N 2003 test year revenue requirement, please provide the following information: (a) The date when the program was approved (or is expected to be approved) by the level of Postal Service management with final approval over the program. The date each vendor contract was executed (or is expected to be executed). 19’C The date of any other action or transaction that you contend creates a binding commitment to incur costs for the project, and the amount of costs thereby incurred. (d) Business records sufficient to verify your responses to the previous parts of this question.

RESPONSE:

(a-d) The attachments to OCAAJSPS-TG-3 (the line summary of the Postal Service’s Capital Investment Plan for FY 2001-2002) and OCA/USPS-TG-4 (Capital Investment Plan FY 2001-2005) provides information on approved major capital programs. Attachment I provides a further breakdown of capital programs as of Quarter Ill, FY 2001, The following tab18 provides similar information for major programs. III. Capital Commitments 6 Capita/ Cash Outlays, by year: EQUIPMENT PROJECTS as of QUARTER ///, 2001 I . Project Name III. Capital Commitments & Capital Cash Outlays, by year: EQUIPMENT PROJECTS as of QUARTER Ill, 2001

Projnc Name

FimA&kTw IX I nclmu caplvr Ruder (RCR) mo Hmdwlilk$ ilccqnilkn Akld M*r-99 $190.6 12.0

2 ------I_-.I .------.. -- --IXI-X,_-~..I I//. Capita/ Commitments 6 Capita/ Cash Outlays, by year: EQUIPMENT PROJECTS as of QUARTER Ill, 2001

Borrd of Govcmon Approval

, . - III. CapiZal Commitments d, Capital Cash Outlays, by year: FACILITY PROJECTS as of QUARTER Ill, 2001

Project Name

Behind lkc-00 u.9 111.5 6%

4 . - -..-~._-_ _^___ Ii/. Capital Commitments 6 Capifal Cash Outlays, by year: FACILITY PROJECTS as of QUARTER Ill, 2001

Project Nmnc :...:--I j:” rrJ?rz~~;~~~

Los Andes. CA BMC $67.7 ( SO.0

ucI( CsMcr~ PLDF. Wakhm. MA Ill. Capita/ Commitments 6 Capital Cash Outlays, by iear: OTHER PROJECTS as of QUARTER Ill, 2001

Project Name

6 III. Capita/ Commitments 6 Cap&?/ Cash Outlays, by year: OTHER PROJECTS as of QUARTER Ill, 2001

BmrdofGoveraonAppmvd Fvojecl Name StmN ~~‘---- .- ~- ~~ LB&

I - 0% I I I I

I Paul Fkld Camputim6 In -(F’FCI)& R.cmob?Olb LAN On-The In.66 $41.6 SO.0 .._. ~_-. .___ -_-~..--...-~ ~-~.-- - mh I FmmlOml,BusinmCvnnrr~Syakm-ocrcl&Ta Bdtii Feboo $10.1 SO.0 Compkkd 44%

1 RadioFmqwcyIn-Dmbpr*bTW On-Hdd lh-97 1 So.0 1 $12.4 I TumMcd( 0% I I I I

I B&W $26.3 1 S3.6 1

,.i,-RA (SAFR-AR)

7 ~ ,,, Iii. Capita/ Commitments 6 Capita/ Cash OuUays, by year: OTHER PROJECTS as of QUARTER ///, 2001

I AlTACHMENT I OCAlUSPS-TG-7

UNITED STATES POSTAL SERVICE

INTEGRATED FNANCIALPLAN FISCALYEAR~OO~ TO THE FY2002 INTEGRATED FINANCIAL PLAN The Information contained in this document does not reflect the impact of the aftermath of the World Trade Center and Pentagon attacks on September 11,200l. TABLE OF CONTENTS

SPECIAL NOTE ...... i

EXECUTIVE SUMMARY ...... 1

OPERATING PLAN ...... 2

NET LOSS ...... 2 VOLUME AND REVENUE ...... 2 EXPENSE ...... 3 Cost REOUOTI~N PRow~h4s ...... 5 PROOuCTlVlTY...... 6

CAPITAL INVESTMENT PLAN...... 6

N2002 CAPITAL INVESTMENT PLAN ...... 7

FINANCING PLAN ...... 9

FINANCIAL OUTLOOK ...... *...... 10

RISKS ...... 10

FINANCIAL POLICIES AND INDICATORS ...... 11

ii ~NTEGRATEDFINAN~IALPLAN FISCALYEAR 2002

The Fiscal Year (FY) 2002 integrated Financial Plan incorporates the Operating, Capital and Financing Plans that are built upon projected FY2001 financial results. With a projected net loss for FY2001 of $1.65 billion, the FY2002 operating plan generates a net loss of $1.35 billion,

Operating rasults in FY2OOl ware hit hard by the economic downturn and increased inflation. Despite the R2000-1 rate increasa that was implemented in January and July of 2001, revenue growth, estimated at 2.7 percent, is slightly more than one-hatf of last year’s expectations or, $1.6 billion below plan.

Economic forecasts estimate that this softness in the aconomy will continue through the second quarter of 2002. Accordingly, with virtually no volume growth in M2001. vdume for M2002 is forecast to grow by 1.1 percent. This vdume growth combined with a full year of increased rates generates revenue growth of 3.7 percent.

Exponso Despite strong expense controts and labor usage below last year, M2001 expanses are estimated to increase by nearly 5.0 percent. lnftation in labor costs and other nonpersonnel items has outpaced revenue growth in the slow aconomic environment.

In ,FY2002. planned expenses will increase by only 3.2 percent. due to further reductions in expanses and work hours. In all of Postal Service history, only in 1994 was the expense growth rate lower. Over the last two years, career complement has been raducad by 21,000 employees while productllity has grown by 4.5 percent. The continuation of thesa trends is incorporated in the FY2002 operating plan with a reduction in work years of 13,000 and productivity growth of 1.1 percent.

Due to reduced operating cash flow in FY2001, the capital commitment plan was raduced from $3.6 billion to $1.6 billion to minimize cash outlays in both FY2001 and FY2002. An FY2001 freeze on new capital commitments was put in placa and induded over 600 planned facility pro+&. Corresponding cash outlays in p/2001 ware reduced from $3.5 billion to $2.7 billion.

With declining cash flows from operations, the FY2002 capital commitment plan of 92.4 billion raflects continued constraint on new capital commitments. FY2tlO2 capital cash outlays are expected to be $2.2 billion, of whit 66% represent pmjacts committed in prior yaars. Over onehatf of the commitment plan provides funding for high return on investment equipment projects; the balance of the plan is for emergency fackkii and other infrastructure wads such as vehictes. h+w facilities construction will remain frozen.

Reducing capital spending in FY2001 kept the increasa in outstanding debt at $2.0 billion. By reducing capital cash outlays in FY2002. the increase in debt is minimized at $1.6 billion. This brings total outstanding debt at the end of FY2002 to $12.9 I,illion. an amount that represents 66 percent of the total statutory borrowtng levd.

Despite management efforts to control the impacts of inflationary wst increasas. an increase in Postal prica is required. Management has developed an Omnibus Rate Filing using FY2003 as the test year. The FY2002 intertm year revenue and expenses included in that filing are based upon and tie to this Integrated Financial Plan. The M2002 Operating Plan was developed under the CustomerPerfect,,,, management cycle. In light of the soft revenue and volume growth of FY2WO and FY2001. and current economic indicators, management adopted a conservative FY2002 revenue plan reflective of modest volume growth.

Expenses have been held below plan in FY2Wl in response to below plan revenue growth. For the year, total expenses of $58.0 billion will be about 5400 million under plan and 5.0 percent more than FY2000 expenses. Management controlled expense growth during PY2Wl in spite of higher labor costs. escalating fuel and utility prices, increased wcxkers’ compensation costs, and rising health benefit wsts. Though mail volume was essentially flat, 1.7 million more ddivery points were serviced with 10,ooOfewer work -years.

NET LOSS

The Operating Plan for M2002 targets a net loss of $1.35 billion. FY2662 opemting 6udga

Total revenue is estimated to grow FY2061 FY2602 x 3.7 percent, from $56.3 billion to 558.8 billion. Revenue growth EsthlUte Plan Chmwe Chsnae reflects the carryover of M2Wl Revenue s 86,340 $66.820 52,460 3.7 rate increases and modest volume Expense growth projected for PY2002. Total 67,900 70.170 2.180 3.2 expense will grow 3.2 parcen!, from Net Loss s (1,6w s we) $300 $57.9 billion to $70.2 billion. This is the second lowest annual expense IS MIflionsl increase since Postal Reorganization.

VOLUME AND REVENUE

Revenue is projected to grew $2.5 billion. Approximatety $1.8 billion of this growth is from the R2000-1 rate increase implemented on January 7 and July 1.2001. The remainder is attributable to volume growth.

Volume Fomrstr 6nd R&ted Rwenuo Imp6ct.s The volume and revenue forecasts undertying the plan were built using DRl7NEFA’s June, 2001 baseline macroewnmic projections. The r - DRIWEFA forecast assumes that Volume ewnomk growth recovers from the anemic 1 .O twc8nt avenrgs during the FY3001 Iv2602 lb last three calendar quarters d 2001 to Estknate Pm Dmwh Qrewm a more tubust rata d 2.0 p0fwti in tqntatrss 103,001 103.463 491 0.5 2002. DRIWEFA ass&wad a Prtertty 1,162 l.j67 24 2.1 55 percent pmbabitii to its basetine 71 73 2 2.6 projection, leaving a 45percent Pertod,utsgxpress 10,190 10.061 -113 -1.1 favoraMeprobabitii ‘Lateassigned Recession’ to its lessand gtsndarr, &,, 60.664 62.301 1.746 1.6 363 376 26 7.6 there is a downside risk associated 766 761 6 0.6 with the vdume projectkms. Additional Intemation~l 6.7 -3.2 adverse economic developments oth*r Mail could reduce volume and revenue 2,246 1.1 belcw what is oroiected for the Tota’ vdums 207,700 206,640 FY2002 plan. Tb volume forecast (MMI~~~ II

2 reflects the impact of modest economic growth and the carryover impact of price increases. Total volume is projected to grow by 1.l percent over estimated FY2001 volumes. First-Class Mail is projected to grow at less than one-half the growth rate of the adult population. currently growing at 1 .l percent. This reflects the sluggish economy and the negative impact of growing Internet use on First-Class Mail volumes. Moderate growth is projected for Priority Mail, Express Mail, Standard Mail and Package Services. Declines in Periodicals vdume are projected to continue and International vdume is expected to build upon its growth in FY2001. Revenue Overall. revenue is projected to grow Pwool FY2002 x 3.7 percant. The revenue growth for Estimate Man Charago Chan6s Priority Mail, Express Mail, Periodicals FltatCIa*s $36,761 $36,367 Moe 1.7 Standard Mail, and Package Services Priority 6,139 6.660 Ml 7.0 primarily reftects the impact of the rate Express 1.023 1,077 04 5.2 increase that occurred in FY2Wl. The lower revenue growth rate for First- Psrtodlcalr 2.275 2,379 104 4.6 Class Mail is accounted for by both 625 5.2 Standard Nail 15.614 16,746 slow total volume growth and declining Parcal post 1,123 1,191 60 6.1 single-piece letter volume. Projected Other Packags Sva. 666 633 47 5.3 growth in International revenue Intmltilonal 1,773 1.636 primarily relates to vdume growth. Other Revmue 3 3 2 1::: Approximately hatf of the $349 million plgwl;wease in Other Revenue is Total Revanue S 66,340 $60,620 12,466 3.7 by diverse revenue (SNlffform~ initiatives, including those of retail, , -_ postal ad networks and e-commerce.

EXPENSE

Operating i3udg6t In FY2002. total expenses are planned at $70.2 billion, which is 3.2 percent more than N2Wl estimated total expenses of SW.0 billion. This represents the wwnd lowest annual growth rate in total expenses sinw Postal Reorganization.

Three labor contracts expired in November 2000. These are the agreements with the Mailhandlers. the American Postal Worker’s and _ the Rural Letter Carriers FY2002 Exponsw unions. In the absence of an approved contract for these w3001 Iv2602 thrae union groups, labor rates E8llmata Budowl Chnw KCh8fW have been estimated based on Fletd ss4.w6 $56,010 $1,210 2.2 an expected Employment Cost carp 1rmspoftauoll 3.026 3.220 266 6.7 Index (ECI) for FY2002. tees Corponhwl-- 2,210 2sw 3so 17.2 1 mt. Int.mt 1,970 2,646 70 3.6 HQ Admlnlstmthm 1.496 1.4ao - - F/e/d EXPUIM 040 l d PRC 110 125 4 10.5 Fiid expenses will increase by suvlm M a 6.6 $1.2 billion in FY2002. with the s s7,990 s70.170 s2.166 3.2 majority d the increase ,I3 Nullorn) attributed-. to intIatii in labtx costs. The growth in fkstd costs till be restrained by $795 million through cost reduction efforts, in&ding an’ SW million reduction in administrative work hour costs at the Are6 and District offices. Health beneMs expense grew by 10 percent in M2001 and is expected to do so again in M2002.

Df the $674 million in FY2002 cost reductions, $795 million relates to field operations. Specific capital investment programs account for $402 million of the field cost reductions. The largest single program is

3 the Automated Flat Sorter Machine (AFSM) 100. In addition to the program savings, other field cost reduction efforts account for $393 million in savings, This is broken down into $280 million savings from operations, $60 million in administrative reductions, 517 million in Supply Chain Management and $16 million in transportation savings,

These programs produce a 1.9 percent work hour reduction in FY2002. In FY2001 work hours will be reduced by 1.3 percent compared to the previous year and were reduced by 0.7 percent in FY2000 compared to FY1999. The Postal~Service last reduced work hours in three consecutive years in the 1976 1978 pertod when Presort First-Class Mail discounts were first introduced. The FY2002 reduction target is equivalent to over 13,000 full time employees.

Headquarters expense includes the headquarters organizations and their ftid service units, and the Postal Inspection Service. Headquarters administrative costs of $1.4 billion are unchanged from the FY2001 estimate, In FY2001, complement was reduced by 500 positions, resulting in $34 million in cost savings. inflationary cost pressures in FY2002 will be absorbed through staffing reductions.

Pmgnmr and Cotpwatwlde Expanse Program and Corporatewide activity costs are budgeted at $2.6 billion in FY2002, compared to our year- end estimate of $2.2 billion for FY2001. Almost 75 percent of the program and corporatewide activity budget is devoted to ongoing activities that represent legal or contractual requirements or are needed to support operations, These include: Mail Transportation Equipment Servll Centers ($313 million), the purchase of Mail Transportation Equipment ($159 million), Stamp Manufacturing ($140 million), and Pointof-Service (POS) ONE ($160 million). The FY2002 planned expense holds total program spending at FY1999 levels and represents an increase of only $279 million over what was originally planned for FY2001. The FY2001 budget for these items was reduced to offset the impact of reduced revenue. ’

Information technology and infrastructure expense programs are planned to increase in FY2002. Included are programs to install security software, advanced employee interfaces to support the transitiin from internal computer applications to Web-bawd tachnotogy Maior Program SPending II and to automate manual Ton-Ten P&am; PI2002 processes. Although these K efforts require substantial in- Fwool PY2ooz vestments, they are le6s , Ploo- Eatlnut6 m6n a-0. cw costly to operate ovw time. In Tetai nnsc Prcgram 222s 6213 Sg) (3.6) addition, in FY2002 reptacb Pdnt of Swvtu 126 1SO 24.6 ment of the internal desktop ~awrtn6 ~a6 ~ransperi 131 166 23 16.7 computing infrastructure will Cwpwata Advertising 140 140 (9 (5.5) begin. The current computing 6tamp ~ar&ach~rlng 162 140 (12) (7.6) environment is technologically ~xpsdtted suppiles 136 126 (13) (6.4) obsdete and no longer sup- ~o~cc~~rognm 101 66 (2) W) pa-ted by key vendors. Wi D~II~ Cemlmution 07 06 12 21.3 out improvements, mainten- TotstACt Pre9ram (2) (3.6) arm casts will increase sub- Environ. Field Support 441 stantially. Updating minimt66e s1,310 s1.327 $7 i.4 future maintenance costs.

As a final point, much d the increase in this category is directly related to the decision6 made in M2001 to defer program spending in wdsc to offset the impact of the anemic economic growth on revenue. These decisions generated short-term expense reductions at the risk of jeopardizing long-term cost reductions. Program spending in M2W2 has been structured to offsat this risk. Servicewide Expense Servicewide expenses are national-level expenses that cannot be isolated and charged to individual operating units and are outside local management control. These expenses are expected to increase by $305 million in F’f2002. This increase is largely driven by annuitant Cost-of-Living-Allowances (COtAs) and annuitant health benefits.

National network transportation, which accounts for over 60 percent of total transportation costs, was significantly impacted by fuel costs in PYZ6gl. Continuing efforts to reduce the cost of the transportation network through means such as shifting a greater percentage of transportation from air to grwnd will limit network transportation costs to $3.2 billion. in FY2002, benefiting from lower interest rates, interest expense on debt will be about $395 million, an increase of $30 million over FY2001. In addition, the current interest expense on Civil Service Retirement System (CSRS) deferred retirement liabilities is expected to increase by $40 million and total $1.6 billion.

To gain a different perspective on the FY20102 Operating Plan, expense growth ~~~002 can be examined by component. W3001 FY2662 K Personnel expense, including annuitant Estimate PIan Chaaga Change and workers’ ccmpensation costs make . S 61,700 t 63,610 1,610 up $1,610 million of the FY2W2 expense ~~~~~w, 3.6 6,230 6,420 109 2.0 growth. Growth in salaries and benefits is 6,070 110 2.2 driven by wage inRation and is not a result tTnyliyon - dii.i n 3.6 d growth in work hwrs which. in fact, dectine in FY2002. Health benefit Totat 6xpnu s 07,600 s 70,170 2.160 3.2 infiati. which had been relatively stable for several years, rose by double digits syN’~*) (10%) in FY2001 and will rise by 10 percent in PY2002. This in turn contributed to the increase in workers’ compensattion expense that is expected to continue into FY2002. Workers’ compensatii expense is expected to increase 6.0 percent, bringing the total to over $1 billion in FY2002.

Deployment of capital investments committed in prior years drives the increase in non-personnel expense depreciation, which is expected to increase by $145 million, or 6.6 percent. A modest increase in direct transportation expenses is associated with the transfer of Priority Mail operations back to the Postal Service and a zero inflatton forecast for fuel costs.

COST REDUCTIONPROGRAMS offsetting the increase in depredation resulting from capital investments are the benefks derived as an asset is utilized. In the FY2gg2 budM, $674 million in cost reductions am included. The beneftts are spread between specific operaMnal programs and other productMy initiatives that are deecrtbed as “Bold Acttow.” Operational programs total $402 million and am targeted entirety at the field. Bold actiis account for $472 million in savings between headquartars and ftetd units. All totd. $795 million of the savings witl be achieved at the field level and the remainder at headquarters.

The primary focus for operational efftciites in PYzoO2 is the processing of flats. Roughly, 60 percent of the program savings will come from these effcrts. with tremendous oppcrtuntties resulting from automated flat sorting machines. Matertat handling programs account for approximately 15% of the program savings and another 15% is due to further consdtdatttn d the Remote Encoding Centers. The final 10% is rounded wt between letter mail programs and Finance’s new Ttme and Attendant Cdlection System (TACS).

5 .

More than hatf of the FY2002 savings results from bold actions to reduce costs, Increased efficiencies in all operational functions will save the organization $260 million through reduced work hours. In addition. reductions in the administrative functional areas will net the Flat Sorting Machines organization $120 million. The final S72 million in Remote Encodlng Center Programs savings will be achieved through supply chain Ttme 6 Attendance Cotlectton System management initiatives and more efficient Tray Management Systems transportation utilization. AAA SWYB ID Code solnng Robotica Parcel Singulator DBCS other $40 Bold Acscms: operations s 200 Adminirtratlv~ 120 Supply Chaln Management Tranrpo~ation ALU Totd s n4

Total Factor Productivity (TFP) measures the change in relationship between outputs, or workload, and all resources used in producing those outputs. Labor productivity measures the change in the relationship between workload (mail volume and deliveries) and the labor resources used in producing those outputs. It is not uncommon for TFP growth to fluctuate from one year to another. During FY2001. both TFP and labor productivity are projected to grow 2.0 percent, equivalent to Sl.3 billion in expense reductions. When compared to other years with strong TFP growth. the p12001 achievement ts significant. In M2001. TFP orowth is estimated to be 2.0 oerwnt in soite of a GJW a&age workload increase of just 0.7’ percent. In earlier years, strong TFP growth was fueted largely by absorbing workload growth. In FY2001, strong productivity growth has been fueled by substantial restraint on resource usage.

The FY2Og2 financial plan assumes a 2.1 percent I ‘- 1 increase in labor pmdu&vtty and a 1.1 percent TFP growth rate. Wkhout this productivity increese. the net loss would exceed $2 billion. The FY2002 financial plan calls for smaller expense gr&th than in FY2001, while total wwkload growth resulting from mail volume and ddNe&S changes will be less than one percent.

The FY2CCl plan for capital commitments was signtftcantty reduced to minimize cash outlays in both M2001 and M2002. This action was necessitated by the impact of the soft economy on postal revenue and the corresponding dectines in cash from operations. Accordingly, the FY2002 capital commitment plan reftects continued constraint on new capital commitments. The FV2002 plan for commitments was

6 reduced from S3.7 billion to $2.4 billion and the cash outlay plan reduced from $3.2 billion to $2.2 billion. Capital investments will focus on funding projects that provide a high return on investment, and on handling emergency infrastructure requests.

FY2002 CAPITAL INVESTMENT PLAN

The FY2002 capital commitment plan of $2.4 billion includes address automation and mechanization Capital Commitments projects that apply to distribution, processing, and FY2661 FY2661 FY2002 delivery systems. Atso included are projects that Pkn Revised Pkn improve the quality of customer interactions. Infrastructure investments will be necessary to Equipment $1,306 $661 $1,230 support workload growth. to repair or replace aging Fadlily 1,067 462 520 . assets, and to provide necessary information and Infrastructure 662 191 472 communications technology networks. Our plans call Vshiclo 335 5s 64 for applying new technologies to achieve aggressive cost management and additional productivity Retail 236 199 80 improvement through projects with a high return on R6D 27 10 11 investment. The current portfotlo of capital investment opportunities will produce an estimated $3,642 $1,601 $2,467 return on investment of approximatdy 17 percent over five vears. As information, the Board has previously approved approximatdy $600 million of the 52.4 billion In. addition, $1.5 billion of the $2.2 billion capital cash wttays in FY2002 relates to

~ Capital Caeh Outlays commitments made in prior years. I I FY2661 FY2661 FY2662 According to its bylaws. the Board of Governors must Pbn Rwtsod Pten approve the capital budget each yesr. Such approval represents a general concurrence with the capital Equipment $1,522 $1,111 $925 investment plan. In addition. the Board must approve FaCitii *,076 615 612 eech investment greater than $10 million. Infraatructuro 425 366 264 Vehicle 265 161 217 All projects in the approved plan are subjected to an Retail 22332 in-depth review and approval process that ensures they are fiscally sound or servtce oriented. ITotal $3,531 S2,7fJg $2,266 1 Accountability is estabtished for the. . . results .the project is expectea to proauce ana me pcojscr Is BIlihVlS) I -. . ~.L~A~*-- -. J analyzea usmg a tcennn on mves~menr meumoomgy to ensure that protections are accurate. Wtatty, studies are conducted on selected Projects, to determine whether financiel and operating goals ara achieved. Ma@ programs and projact descriptions fdlow balow.

Equipment The equipment category of the FY2002 capital commitment plan totals $1.2 billion. w 51 percent, for programs that generate reduced operating costs. The chart on the fdlcwing page retTeds the allocation of funds across the various types of equipment projects.

Automated equipment not only saves work hours and associated indirect costs but also improves speed and service quality. Automatton provides management with data gatheting capabilities that can be used in future information-based sewtces. For example, the matertal handling systems can be integrated with the Next Generation Small Parcel and Bundle Sorting Machine that utilizes optical character readers and video encoding to process over 11,000 pieces of mail per hwr..CornpleMn of the AFSM 100 program will improve processing of periodicals and flat mail volume.

7 Investment in the Postal Automated Redirection System (PARS) is expected to yield large savings by lNlZGRAT6D FlNANCtAL PLAN FY2002 eliminating multiple downstream handling and a moving the process of all undeliverable as - E!aumdr----- addressed letter mail into the automated mail stream. It will also improve service by significantly reducing the amount of time to process this letter mail volume.

In M2002. 5520million will be committed on facilities. These are arnergency facility needs only. Consistent with the freeze on new commitments, rather than build new facilities, management will optimize use of existing space whenever possible and avoid investing in more costly new construction.

With average annual growth in ddivery points of 1.5 percent, the customer service facility infrastructure will be maintained via ongoing repair and alteration projects equal to 64 percent of the FY2002 facilities plan. Also induded are commitments fw major mail processing facilities such as the New Jersey Metro Processing and Distribution Center in Teterboro. New Jersey.

In M2tlG1, the planned commitments fcr vehides were delayed in response to the capital freeze. Due to continued growth in deliveries and the aging &tide fleet, the FY2002 caoital plan includes funds in the amwnt of $94 million for cargo vans and carrier route vans.

Infrastructure projects maintain and meat communication, computer and netwcrk system needs. The capital freeze forced the re-prioritization of the planned FY2001 infrastructure investments. Only non- discretionary or high return on investment projects were pursued. The FY2lXt2 Capital Commitment Plan for infrastructure is 6472mittttn. Included in this category is the Mailing Evaluation Readability and Lookup INstrument (MERLIN) that improves the consistency of mail acceptance, veri6es meter amounts. and weighs and measures the thickness of mail to determine that proper postage has been pad.

Other systems in&de the Detivary Operations Information System (DOIS) infrastructure project reduces work hours by provtding supervisors with actiiabte data on available reswrcee to handle daily workload. The next phase of the Surface and Air Management System (SAMS) improves wr ability to control air routing and transportation coats. The Time and Attendance Collection System reptacea five systems and reduces considerable work hours mtated to timekeeping. Tha initiation of the Human Reawrcea and Payroll Enterprise project, to reengineer and replacewr current personnel and payroll systems, is pert of the M2W2 plan. Finally, imp&nenting the Enhanced Security Capability program will permit secure communketton wtth busineaa partners. customers, and employees It will mitigate the risk of a financial loss and ensure the ability to provide services throughout the business environment.

Ratail In M2W2, $6Gmillkm66Gmillkm will be committed for retail operates. Over 76parcent d thtt amwnt is earmarked for Stage 3 of Pdnt-of-Servtke (POS) ONE. When fully deployed. POS ONE will capture detailed sales and customer informatii. This,This. when integratedinteorated with the technologytechndociv platform,platform. will reduce accounting workload in distrtct &ices. integrate det&redttdebiffcredtt card funcUlnai~~functttnattt. pro&provtde inventory menagemant. enable automatic reordering, and provide for post cdfke box administration.

6 The Financing Plan for FY2002 is integrated across fiscal years with the Operating and Capital Plans for FY2002. With numerous uncertainties facing the Postal Service, a multi-year strategic view of our financing needs is required, especially in light of the statutory limits on our debt,

The annual change in debt within a fiscal year is - driven by the interaction of cash flow from operations, capital cash outlays, and changes in our cash balance. When cash flow frcm operations has exceeded capital cash outlays, debt has been reduced. In recent years, cash outlays for capital have been greater than cash ftow generated from operations and debt has increased. . Last November, management estimated that cash flow from operating activities would total $1.8 billion in M2001 and capital cash outlays would be $3.6 billion. A $200 million increase in cash was recommended to provide a cushion for financial uncertainties the Postal Service could be facing in the years ahead. Based on the plans for a net loss, capital cash outlays and cash on hand, management estimated an increase in debt outstanding of $2 billion. Since presentation of the Integrated Financial Plan last November, net tosses have worsened but liquidity has been preserved by reducing capital cash outlays. Additionally, in May, the Board Audit and Finance Committee was nottted that up to $1 billion in obligations to~be accrued in FY2rXX might not result in cash outftows unttt FY2002. Therefore, a larger cash increase at the end of FY2001 is recommended, in part to provide next ’ year’s added payments, but also to serve as a buffer against inueased risks. The financing request for FY2001 remains at a net increase in debt outstanding of $2 billion.

For FY2002. management projects that cash flow from operations will ha $200 million based on a loss of $1.35 billion. Accrued payments from W2001 contribute to the low cash flow from operattts. as doas the fact that FY2002 has 27 payroll tax days, versus the usual 26. Capital cash outlays are projected to total $2.2 billion. A net increase in debt of $1.6 billion in FY2002 is newssary to finance the capital cash outlay target. At the end of FY2002. debt outstanding with the Federal Financing Bank will total $12.9 billion. and cash and cash equivalents will be an estimated $ssO million.

On a cautionary note, the cash ftcw tigures can be no more than approximate, since they are based on underlying assumptions and judgments regarding cash versus non-cash expenses and changes in working capital accounts. In addition, risks to the net loss plan translate into risks to cash flow from operations that could increase borrowing in MM02 or require that management make greater reductions to the cash balance.

9 The chart at right shows the critical elements of the financial condition for FY2001 and FY2002. The first four lines of this chart reflect the generation of cash flows from the operations as outlined in the Operating Plan. As noted in the Financial Planning section, accruals and an extra payroll tax day result in only $200 million of projected operating cashflows in FY2002. The next line in the chart shows anticipated capital cash wtlays. The dtterence between cash flow from operations and capital cash outlay net of any planned changes to cash on hand is the amount needed to borrow, which drives the Financing Plan. The remainder of this chart provides additional information on the Postal Service’s financial condition. Debt represents the expected outstanding debt at the end of each Rscal yaar. The capital commitment plan retTeds the estimated new capital . commitments in each year. The equity amwnt - the Cash flewFrcmCparattens sum of contributions from the federal government CaptWCashCuUay and prior years’ losses - is shown in the last line of Changs in Cash this chart. Nat Bwewlng

Board Resolution 95-9. concern equity and recovery of established a policy of ‘equal or exceed the cumulative recovery target” set in the last omnibus rate proceeding. Due to accumulated impacts of earker net incomes that exceeded annual targets, the Postal Service entered FY2061 $1.1 billion ahead of the cumulative target. However, given the projected net loss of $1.65 billion in FY2Wl and $1.35 billion in FY2W2, the Postal Service will finish FY2W2 $2.5 billion below the target.

Resdution 95-g provides that, tf tt appears that the projected recovery target will not be met, the Board and management ‘will take acttons that reduce costs and/or increase revenues.” Managements pretiminaty Operating Plan includes approximatdy $874 million in cost reductions and approximately $187 million in revenue increases from new initiatives. Atso. management is continuing to make capital investments that will produce addttional savings in future years. However, additional revenue, derived from a postage increase, ts needed to put equity restoration back on track.

The M2002 Integrated Finandal Ptan is the product of an extensive development process, during which numerws scenartos vmre examined. Management has established a firm foundation for the achievement of the plan. Aggraesive acttts to manage expenses in response to the slow vdume growth during M2001 have been successful. Because the $1.35 million net loss in the PY2002 plan is minimized, there is minimal reserve for unforeseen events. Risk factors must be acknovM&ed and are discussed below.

Governors’ modified rates were implemented in July 2001, principally impacting Standard Mail and Package Servii. Historically, mail volume growth has tended to dip after a rate increase. Other factcrs. such as the economic slowdown and migration of mail toward lower-contrtbution categories may exaggerate the normal post-rate stowdown in growth. Management betttves the modest volume growth plan reflects recent experience. However, acceleration d these trends could result in vdume declines.

Economic Risk Significant dangers and risks characterize the Postal Sewtw’s economic environment. as FY2W2 bagins. Oil prices are still very erratic. As private sector enterprises continue to post profits lower than .

analyst expectations, concerns mount about a lengthier economic downturn. Federal Reserve attempts to counter this by lowering interest rates have had little impact. Should the economy slow more rapidly or severely than management estimated, significant negative impact to postal operations will result.

Labor Ahitration Three labor WntraCts, the American Postal Worker’s Union, the Mailhandlers. and the Rural Letter Carriers are currently in arbitration; and the Letter Carrier contract wmes up for renewal in November 2001. In the absence of an approved contract, labor rates for these three union grwps were estimated based on the expected Employment Cost Index (ECI). less 1 percent each year. Should the negotiations produce a substantially different outcome. the ability to achieve the FY2W2 plan will be materially impacted.

Expense Risks A continuation of FY2001 adverse workers’ compensation trends in Ff2002 could drive costs beyond the . optimistic estimates included in the plan. Management believes that the acceterated claims processing has a one-time impact that will not continue over the course of FY2W2. However, the increase in reported injuries, disproportttnatety attributable to occupational claims filings. may have a lasting impact on the number of medical and indemnity claims as well as the average cost per medical daim. This could adversely impact the workers’ wmpansation expense accrual and result in additional costs in FY2002.

As always, the potential for the occurrence of unplanned events, such as natural disasters whiih could adversety impact the Postal Service’s finances. must be acknowledged as a risk.

In 1999, the Board of Governors adopted selected financial Indicators for their use in setting financtal policy for the Postal Service. The areas of financial performance are: financial margins, capital structure and efficiency. The indicators frame the planned Postal Service ftnancial results for p/2002.

The charts betow reftect the historical results of these indicators for Ml995 through FY2002. The tntegrated Financial Plan produces an operating margin result of 1.O in FY2002. Operating margin, defined as operating income divided by revenue, measures performance in areas in which management has the most control. The cash flow to capital expenditures ratio is calculated by dividing operating cash flow by capital cash expenditures. This defines the level of capital expenditures to be financed from internal cash generation versus external financing. For the FY2002 capital structure, a CAPBX result of nine will be prcduced. This is significantly lower than in recent years.

INTEGRATEDFINANGtAL Pull FY2002 INTEGRATEDFlNANCtAL PLAN FY1002

I Opwaln~ Yarpln 210 , C.sk Plow to CAPEX Ratio

11 ATTACHMENT II OCA/USPS-TG-7 Final Draft 11/03/2WO

UNITED STATES POSTAL SERVICE

INTEGRATED FINANCIALPLAN

. FI~GALYEAR~OO~ Final Draft 1 l/OY200+3

TABLE OF CONTENTS

EXECUTIVE SUMMARY ...... 1

OPERATING PLAN ...... 4

NET INCOME (Loss) ...... 4 Vowh4E ANO REVENUE ...... 5 REVENUE )NlTlATlMS ...... 7 EXPENSES ...... 8 COST REDUCTION PROGRAMS ...... ,__,_,.,...... 10 PROOUCTlWr, ...... 11

CAPITAL INVESTMENT PLAN...... 13

CAPITAL PLAN HIGHLIGHTS ...... 13

M 2000 CAPITAL b,,KSTMEMS ...... 13 FY 2001 CAPITAL INVESTMENT PLAN ...... :...... 14

FINANCING PLAN ...... 10

RISKS ...... *...... 19

FINANCIAL POLICIES AND INDICATORS...... 21

FINANCIAL INDICATORS ...... 21 HISTORICM RESULTS OF FINANCIAL INDICATORS ...... 22

FINANCIAL OUTLOOK ...... , ...... 23

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hlEGRATEDFNANcIALPLAF4 FISCALYEAR~OO~

The Fiscal Year (FY) 2001 Integrated Financial Plan incorporates the Operating, Capital and Financing Plans that are built upon estimated FY 2Wtl operating results. These components of the Integrated Financial Plan are linked as indited on this diagram. The Operating Phn allocates resources to meet established goals and generates operating m INTEGRATEDFINANCIAL PLAN FY 2001 cash. A portion of that cash flow is an element of the Financing Plan in which cash and debt are managed. The Cap&al Plan allocates funds for construction and purchase of facilities and equipment that will improve service and infrastructure and generate future efficiencies. These investments are partially funded by cash ~flows generated from the Operating Plan. Y FUlld8 3 Cash Flow for Inwstm*nt from 0pmtton* Highlights of lntegratwd Financial Plan

Operating Plan The FY 2661 Operating Plan projects total revenue of $67.9 billion, an increase of 5.2 percent. This projected revenue growth is driven predominantly by the price increase anticipated for January 2691. The Ff 2001 Operating Plan was developed in the context of disappointing revenue and vdume growth in FY 2000. The revenue weakness began shortly after the January 1999 rate increasa and has continued through the present. The plan estimates that the combined effects of the plce increase, the slowing economy, and an exceedingly competitive environment will flatten mail volume growth in 2001.

The M 2001 expense plan of 566.4 billion is an increase of 5.6 percent ovar estimated year-end FY Xl66 expenses. This increase is due almost entirely to inflation and other expenses required for operations. The new operating expenses follow five quarters of imposed restraint on expense growth and are now necessary to upgrade servk~s. product offerings,, and infrastructure. Continually cutting costs to achieve positive net i-es eventually presents the risk of making it d#frrlt w impossibte to engage in the type of innovation neceesary to survive in an increasingly complex and competitive environment’. Continued cost cutting in order to achisve positive net incomes will ultimately affect infrastructure, which places the long-term future of tha organization at risk. Allocating these monies to required operating expenses rather than to present Net l-e is an essential strategic investment in the immediate and long-term future of the Poatal Sewkze.

Of this $3.6 billion growth in expenses, $2.7 billion is dedicated to the field. The major portton relating to wmpensetiof~ anc~benef#s. The growth in personnel expenses is entirety owing to higher than average increases in salary and benetits mandated by cost-of-living adjustments (COLA) and the naw NatjOnal

’ As reported in Business Wsek. July 17.2ooO.Professor Gary Hamel of the Harvard BusinessSchod terms this strategy, %orpomteliposuctton.’ and wsms that it can be taken too far. He pointed to a recent study of companies that raised earnings at least Rvetimes fester than sales bstwsn 1993 and 1996 and experienceda significant downturn within three years thereafter. Final Draft 1l/OY2006

Association Of Letter Carriers (NALC) contract. Health benefits expense had a double digit increase in FY 2000 and is expected to increase by double digits in FY 2001.

FY 2001 Corporatewide and Program activity expenses will be $2.8 billion, an increase of $142 million. This expense increase represents, in part, a return to normal and necessary levels to ensure the Postal Service’s future after the severe reductions of the last two years. Depreciation expense increases $207 million with the largest part of this increase due to deploying the Point-of-Service (PDS) ONE retail terminals and the’Automated Flat-Sorting Machines, AFSM 100’s.

The remaining expense growth relates to increases in Servicewide costs of $419 million, and interest expense of (6227 million. The increase in Servicewide expanse is due to increases in annuitant related costs and growth in workers’ compensation.

The PY 2001 Operating Plan sets ambitious productivity and expense management targets. Although essentially zero growth in mail vdumes is projected, management anticipates shifts in the mail mix towards lower-work-content mail, and budgeted work hours accordingly to account for this change. Additional reductions in budgeted work hours have been achieved as a result of Breakthrough Productivity Initiatives @PI) and program cost savings, which dictated further work hour reductions in the FY 2001 plan. In total, the budget calls for a 1 S percent reduction in work hours, or 13.200 workyears. This reduction fdlows the 0.7 percent (6200 workyears) reduction achieved through local management initiatives and program cost savings in FY 2000. Transportation costs are budgeted at the same level as FY 2000. as newly instituted efficiencies will offset, rising fuel prices.

The BPI Initiative focuses on four specific areas:

l The Operations segment focuses primarily on improving plant, delivery, and customer service non-retail operations through the application of perfwnance management techniques, the identification and distribution of best practice tools, and implementation of standard operating procedures. These efforts hdp support the work hour reduction target.

. The Transportation effort will focus initially on utilization and modal optimization, including the potential for expanded use of rail. During FY 2001, these efforts will hdp keep the transportation expense at FY 2000 levels.

l Purchasing initiatives will indude use of Web-based purchasing, improved supply chain management, and strategic outswrcing.

l Overhead initiatives include reductions in personnel and non-personnel costs in headquarters, area, and other administrative offices.

The workload projecttons combined with the work hwr reductions and changes in materials and capital use result in an estimated Total Factor Productivity (TFP) increase of 0.7 percent for FY 2001. This follows TFP growth of 2.4 percent in FY 2000. The labor productivity component represents a 2.0 percent increase in FY 2001. following a 2.1 percent increase in FY 2000. Note, since labor productivity is a partial measure, it dces not distinguish whether the increase is due to growth in the other inputs (capital and materials) (Y due to increases in efficiency.

The net result of these revenue, expense management, and productivity targets is ,a net loss of S466 million. Depreciation and other non-cash expenses included in the net loss of 5480 million produce cash flow from operations of approximately $1.7 billion.

Capitwl Plan The Capital Plan portion of the Integrated Financial Plan consists of 63.6 billion in capital commitments and capital cash wtlays of $3.5 billion, The Capital Plan supports the goals of the strategic plan. A new

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five-year Capital Investment Plan has bean presented to the Board covering FY 2001 - 2005. The Board approved the last five-year plan in October 1997, for fiscal years 1996 - 2002. Historically, the Board approves a five-year plan each year with more current information and extension into the next fiscal year. However, to allow time to reassess the strategic direction of the Postal Service and align the investments with that direction, the Capital Plan was only updated for FY 1999 and FY 2000. Now that the strategic plan has been sdidified. it is time to update the long-term capital investment strategy forthe next five years. The overarching strategy is to:

l Concentrate on high return investments, such as automation/mechanization, and information platform projects;

l Maintain the existing infrastructure (facilities, vehicles, and information systems) and

. Accommodate growth areas, including delivery network growth

Financing Plan Based on estimated FY 2001 capital cash outlays of $3.5 billion, and the estimated $1.7 billion in cash to be generated from operations, management estimates that $2 billion in new net borrowing will ba required. An increase in cash of $200 million is embedded in this borrowing requirement, With the additional borrowing, outstanding debt at the end of FY 2001 will be $11.3 billion. The FY 2001 increase in debt follows a $2.4 billion increase in debt in PY 2000. Average daily debt outstanding will increase from S4.7 billion in FY 2000 to $6.9 billion in Ff 2001. Interest expense on debt will increase from $270 million to $430 million. Risks to the net income plan translate as risks to cash flow from operations and could adversely affect borrowing and liquidity. If the net loss is greater than planned, cash from operating activities will be lower, which could increase borrowing levets.

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The N 2001 Operating Plan was developed under the CustomerPerfect, Establish, Deploy, Implement, and Review cycle. After review. it became apparent that the revenue target was too ambitious in light of the soft revenue growth during FY 1999 and 2000. Accordingly, management reduced the 2001 revenue plan to reflect essentially zero volume growth. Management believes this weakness, especially in Single piece First-Class Mail, is most likely due to mailing industry consdidation and to the diversion of communications from hard copy to electronic media.

Expenses were held below plan in FY 2WO in response to below plan revenue growth. For the year, total expenses of $64.6 billion were $534 million under plan and only 3.6 percent more than FY 1999 expenses. Management controlled expense growth during FY 2000 in the face of 5.4 billion more pieces of mail, 1.6 million more deliveries with 6,200 fewer workyears. This performance is more impressive when the additional wsts of rapidly escalating fuel prices, workers’ compensation costs and medical expanse inflation are considered. Higher fuel prices cost the Postal Service an estimated $275 million in M 2000.

Medical expense inflation, which had been relativdy stable for several years, heated up again in FY 2000, increasing health benefits expense by 12.2 percent. This, too, impacted workers’ compensation expense, although the FY 2000 increase was driven primarily by a higher number of claims. In FY 2000, the number of paid indemnity claims increased by 6.2 percent, the number of paid medical claims increased by 7.7 percent while the average wst per medical claim increased 13.7 percent. These increases were of unprecedented scale and were due primarily to three factors. Those were: expedited claims processing by the Department of Labor: a 5.9 percent increase in injuries, primarily occupational injuries, reported to the Department of Labor; and a larger proportion of occupational medical claims, typkally having higher costs per claim than traumatic claims.

NET INCOME (Loss)

The Operating Plan for FY 2001 . targets a net loss of S460 million. PY 20010t~era6n9 Budget f$ Million@ Total revenue is estimated to grow 5.2 percent, from 564.6 billion to 2860 2881 K $67.9 billion. Revenue growth is almost all due to the proposed Estimst. Plan Incresss IIWO~ 6.4 percent rate increase that Revenue 84.581 87.825 3.344 5.2 management expects implement in January 200; Expense --- 5.8 Approximately $200 million of the eat tncoms S (~6) S (466) (266) revenue growth is derived from a minor charqs in the volume mail mix. The revenue plan also includes $304 million of new revenue generated by 8Business initiatives, retail initiatives, and co-branded advertising.

Total expense will grow 5.6 percent, from $64.6 billion to $66.4 bllllon. Of the $3.6 billion in expense growth, $2.2 billion, or 59percent. is due to field salaries and benefits and to other personnel compensation. This represents a 4.9 percent increase in compensation expense over FY 2600. The remainder of the growth is in non-personnet. annuitant costs and interest expense, increases of $1 .O billion, $363 million and $227 million. respectively. The FY 2001 plan includes adding 1.7 million new deliveries, and no workload growth associated with mail volume. The plan does include cost reductions of $1 .O billion.

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The growth in Compensation expense is entirely related to higher average salary and benefits rates, driven by cost-of-living adjustments (COLA) and the new National Association of Letter Carriers (NALC) contract. The increase in personnel costs would be much larger were it not for a planned 1.5 percent reduction in field work hours and administrative reductions at headquarters and the area offices.

The cost pressures that made a major impact on the FY 2000 bottom line are expected to continue in FY 2001. In addition, the FY 2001 plan calls for increased spending on e-Business initiatives as well as continued investments to improve customer service, grow traditional businesses and maintain infrastructure.

VOLUME AND REVENUE

Total revenue is projected to grow $3.3 billion, which is 5.2 percent higher than the FY 2000 estimate. The major drivers of revenue growth are First-Class. Priority, and Standard (A) mail, which combine to generate 66 percent of the total revenue. Minimal growth in mail volumes is projected in FY 2001, based on product elasticities and below plan mail volume growth in FY 2000.

Economic Basis hr Revmur and Volume Forecasts Over 90 percent of mail volume originates with businesses and other institutions. How businesses use the mail to achieve their objectives determines Postal revenues. Consequentfy, economic activity and the trends in business practices fundamentally drive Postal Service volume changes.

The New Economy: In recent years, U.S. economic growth has been exceptionally’strong as the technology-driven “New Economy” led to the highest productivity growth the U.S. economy has experienced in decades. The increasing spread of computers, new software and the use of the Internet have enabled businesses to operate more efficiently and to better meet customer needs. Consumption spending has grown strongly in the first ha5 of 2000 as households benefit from rising higher incomes. low unemployment and investment gains. The American people have enjoyed the longest economic expansion in U.S. history.

Risks in the Economy: Significant dangers and risks characterize the Postal SetMice’s economic environment, as FY 2061 begins. The phenomenal rise in equity prices seems to have waked. The U.S. trade deficit is now greater than 4% of the Gross Domestic Product (GDP), causing prudent analysts to question whether the rest of the world will continue to Snance low U.S. domestic saving and hiih stock market valuations. Worldwide economic growth has caused commodii prices to rise significantly over the last twenty months raising a very serious warning that inflation could return to the world economy as it did in the 1970s. oil prices have risen frcm as low as $10 a barrel in 1996 to over $36. As labor markets have tightened and cepacity becomas strained, concerns about domestic inflation, which has been rising has moved the Federal Reserve to raise intereat rates.

Mail and Ihe New Ewnomy: While the New Economy seems to have outstripped the dd rules of the business cycle, there is evidence that growth in the New Economy does not translate into mail vdume growth to the same degree as did traditional economic growth. First-Class single piece mail has been shrinking and Standard A growth is somewhat more modest than would be expected given the extraordinary economic gro+vth of the last five years. Information Techndogy has certainly made communications markets more competitive and complex. The World Wide Web has made the Internet a potential alternative to hard copy billing. The growth of the Internet as an advertising medium has made it more difficult for direct mail to compete for its share of the advertising dollar. Simultaneously, Information Techndogy has improved the prospects for fine-tuning targeting and, thereby, for growing the mail.

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Management regUlarly monitors both the economy and market developments. The FY 2001 plan incorporates reCent trends and is based on an economic forecast that reflects these current uncertamties. The Consumer Price Index (CPI) is expected to rise 2.0 percent and the employment cost index (ECI) an alarming 4.6 parCent in FY 2000. Total consumer spending is projected to rise 2.7 percent in real terms.

Volume Foracasts and Relrtad Revenua Impacts Prices, economic develooments. and r technology drive volume growth, as Volume well as that of competitors’. In analyzing these factors and Plan % forecasting Postal Service economic I outcomes. the pricing assumption First-Class Fy103.52 2y%y5f=j underlying the analysis is particularly Priority important. The FY 2001 revenue and EXDWSS volume plan assumes R2ooO-1 rates, Pe;iodlc.lr 10,365 IO,3711 13 0.1 as proposed by the Postal Service, will Standard (A) 90,057 69,469 -566 -0.6 be implemented January 76. 2001. Parcel Post 324 376 52 15.9 Should the Postal Rate Commission 0th.r Std (6) 604 769 -36 4.4 substantially change the proposal, a International 1,099 1,054 -46 -4.2 major impact on M 2001 estimated Other Mail 413- 406_ II -1.2 revenue and volume would likely Total Volume 207.662 206,206 326 0.2 result. (Millions)

Overall Mai/ Volume Growth: R2000-1 rates will not only affect the fiscal year growth but the pattern within the year. The proposed rates for some of the more price sensitive products (such as Standard A and Priority) are larger than the 6.4 percent average rate increase and will cause negative growth rates after the new postal rates are implemented. The projection is for no volume growth in N 2001 based on positive growth at the beginning of the year and volume losses over the last two thirds of the year.

I R6venue PIllI n First-Class: The projected growth in FY 2000 FY 2001 Changa Chanaa First-Class Mail volume is 0.9 percent First-Class 35.516 36,503 967 2.6 in FY 2001. First-Class Mail will PrioritY 4.637 3.330 493 10.2 continue to be impacted by electronic Express 9% 1.039 43 4.3 media. Largely due to rate increases, Psrlodicals 2.I7I 2,397 226 10.4 First-Class revenue is estimated to Standard (A) 15.193 16.025 632 5.5 grow $967 million, 29 percent of the Psrcel Post 1.042 1.057 I6 I.4 total M 2001 increase. Other Std (0) 670 922 51 6.9 Int*rnatlonal I ,6S6 1,746 5.3 Other Rwanuo z2m2am&E 26.5 priorty Mail: Priority Mail vdume Total Rawnua 64.561 67,925 3,343 5.2 growth, with an average price increase (S in MIllIons) of 15 percent, will drop to 0.7 percent. This is one of the lowest volume growth rates in almost two decades. Priority revenues are targeted to increase S493 million, or 10.2 percent, which is 16 percent of the total planned revenue gr tMh.

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Srandard (A): After persistent softness in 1999 and the beginning of FY 2000, Standard (A) finished FY 2000 with 5.1 percent vdume growth. Standard (A) volume is projected to decline 0.6 percent in FY 2001, primarily due to the price elasticity typically seen after new rates are implemented Due entirely to increased rates, Standard (A) revenue is projected to increase $832 million.

Parcel Post Parcel Post revenue is expected to increase only 1.4 percent despite an estimated 15.9 percent volume growth and a price increase. This disparity is due to declining revenue per piece as mailers take advantage of the discount rates for drop-shipping, increasing volumes of Parcel Post entered more deeply into the system.

Infernational: International mail revenue is targeted to grow $69 million, or 5.3 percent on a volume decline of 4.2 percent. Growing diversion to electronic media wntinues to Constrain international mail volume growth.

REVENUE INITIATIVES

The $304 million target for new revenue generation is split equally among three initiatives: eeusiness, w- branded advertising, and retail revenue. eBusiness initiatives are projected to provide benefits by leveraging Information Technology and Internet communications to create greater customer satisfaction. cost reduction, revenue generation. and/or employee satisfaction. These new initiatives are for Internet based products and services for consumers. businesses and government entitii that will generate revenue to the Postal Service through user charges and license fees. These initiatives indude ePaymenh. NetPost.Certified, PosteCS, StampsOnline/Postal Store, and USPS Electronlic Postmarknl (EPM).

An aggressive retail revenue plan for FY 2001 complements the eBusiness initiative. During the CustomerPmfact!,,,, catchball process. it was determined an additional $100 million revenue opportunity existed for retail operations. This was based on the missed revenue opportunity attributed to low sales skills as measured by the Mystery Shopper Program during FY 2000. To achieve the revenue initiative target, Retail Operations has developed unit level revenue plans, calculated from the Mystery Shopper swres. Postmasters and Station Managers have been given a daily walk-in revenue threshdd. The plan to increase retail revenue has three stam. called horizons. In M 2001, effort will be concentrated on the first hcdzon. by focusing on w7utltwinbke... increasing s&e d existing products, enforcing operating diiplines. and developing partnerships. Passport acceptance generated revenue of $56 million in M 2000. One Retail initiative calls for expanding Passport Acwptanca sawicaa to X additional sitea identified by the State Department as 4 a critical need. I.” “” nm ,.a “” r.*

Sales of w-branded and commercial advertising rely on the name recognition received through partnering, commercial advertising sales, and sponsorship activities. Revenue growth of $100 million has been targeted for this initiative.

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EXPENSES

Operating Budget In FY 2001, total expenses will be $69.4 billion, which is 5.6 percent more than FY 2000’s estimated total expenses of $64.6 billion. The FY 2001 growth rate is high, due to labor cost inflation and to servicing an ever-expanding delivery network. The addition of approximately 1.7 million new delivery points in FY 2001 is equivalent to servicing a city the size of Chicago. Additionally, without approximately $1.0 billion in cost reductions built into the plan, expanse growth would exceed 7 percent.

The major drivers of the higher growth rate in 2001 are cost increases for labor (COLA), corporatewide and p&am .expenses. and FY 2001 Expenses depreciation. 2000 2001 K 1Three labor contracts coma up Estimate Budget Change Change for renewal in November Flold 52,035 54.746 2.714 5.2 2009. These are the American Corp. 1rsnsportation 2.6S6 2,647 (11) (0.4) Postal Worker’s Union, the CWA 6 Programs 2.655 2,707 142 5.3 Mailhandlers, and the Rural Interest 1,620 2,041 227 12.6 Carriers. In the absence of an HQ Admlnlnistrative’ 1,300 1,306 67 6.6 approved contract for these OIG 66 113 4s 66.7 three union groups, labor rates Servicowide m 4.455 gJ 10.4 have been estimated based 64.761 66,405 3,624 5.6 on an Employment Cost Index (ECI) assumption. Combined with the carryover of wage increases from the previous contracts, the actual assumed new salary increases equate to ECI -1. The labor agreement with the Letter Carriers has one additional year to run and those increased costs can be estimated fairly precisely. The Letter Carrier upgrade from level rive to level six will cost an additional $299 million.

Field Expenses Field budget increases account for approximately threequarters of the expense growth, increasing by $2.7 billion (5.2 percent). About $2.2 billion is for personnel compensation and benefits, due entirely to higher averags salary and benefits costs. The major drivers of the higher costs are COLAs for substantially all bargaining unit employees and the higher wage rat66 given to city carriers in the new NALC contract. He&h beoefts expenses, which inueased 9.4 percent for active employees and 12.2 percent overall, are expected to increase another 10 percent again in FY 2001.

These ccet iweases are offset by a planned 1.5 percent reduction in wofk hours, which equates to a $700 million reduction. FY ZWI will be the second year in a row with work hours below the previous year. This will be only the foudh time since 1980 that this has occurred. Reductions of a similar scale attained in the late 1970’s wBTB largely enabled by the introduction of presort incentiies and resulting work- sharing. Work hour reductions were obtained in FY 1990 and FY 1992 in a period of flat vdumes and corporate reebucturing. The Postal service has not attained a reduction of 1.5 percent in the last 20 years. The Field work hour budget for FY 2001 is extremdy challenging, but without this large wofk hour reduction, expenses would be approximately $700 million higher. Attainment of the Breakthrough Productivity Initiatives will be a critical aspect of the woh hcur targets reduction.

Fuel cost inflation will continue to exert upward pressure on fietd expenses in 2001. However improving transportation efficiency will largely offset this. As a result, fietd transportation expense increases a modest 0.6 percent, while the total transportation budget for FY 2001 is essentially the same as FY 2000: Another major driver of field expense growth in 2001 is depreciation. which will increase by Over $200 million due to increased capital investments already made and now in use. Final Drafll1/032WO

Headquarters Expenses Headquarters administrative costs of $1.4 billion, which are held at essentially the same level despite inflation and the Sales organization being redefined as a headquarters unit, include the expenses of headquarters organizations and their field service units, as well as the Postal Inspection Service and the Postal Rate Commission. Headquarters administrative budgets are $07 million more than FY 2000, due entirely to expanded budgets for eBusiness and the transfer of the Sales organization to headquarters. One component of the BPI will be continuing the administrative reductions that were started during FY 2000. In FY 2000, headquarters complement was reduced by 400 positions. In 2001, complement will be reduced by 500 additional positions,

Programs and Cofpontwtde Expenses Program and Corporatewide activity costs of $2.6 billion will increase by approximately $142 million, or 6.3 percent, over 2000. Increased spending for a series of e-Business initiatives, and information technology infrastructure projects such as Point of Service and the Information Platform drives this increase.

these items was essentially fdlowed for FY 2001. However, necessary spending increased for eBusiness initiatives, POS ONE, and other critical programs such as delivery confirmation and the Delivery

program budget. In spite of 81 82 (2) (23) more than doubling spending - -- 50 66 7 10.0 to continue the rollout of POS 2 122 ONE. net spendtt on the _a !! largest programs actually lpeo 1,4eB (2) (all decreases by $2 million.

Sefvicewide expenses, which are national-level expenses that cannot be isolated and charged to individual operating units and are often not wntrdlable by management, are expected to increase by $419 million in FY 2001. This increase is largely driven by the increases of $124 million in the accrual fcf civil service retirement annuitant COLAS, $100 million for increases in annuitant health benefits costs, and SIW million for increased workers’ compensation.

Transportation was significantly impacted by fuel costs in FY 20W. Similar trends are expected to continue in FY ,2Wl. Because much of the transportation network is served by contractors there is a Final Draft 11/03/2WO

delay in the pass through of fuel Cost increases, thus continued upward pressure on prices is expected into FY 2001. By continuing efforts to reduce the cost of the transportation network through means such as shifting a greater percentage of transportation from air to ground, network transportation expenses will be held to $2.8 billion, approximately the same as 2000.

In FY 2001, interest expense on debt will be about S4430million, an increase of $180 million over FY 200C1.This increase is caused by continued cash outlays for operations and capital investments, combined with higher interest rates and slower growth in revenues. In addition, the current interest expense on CSRS deferred retirement liabilities is expected to increase by $50 million, to $1.6 billion. of the $50 million increase, $32 million is interest on the CSRS principal and $16 Million is interest on the COLA principal.

Expenses by Component To gain a dierent perspective on the FY _ 2001 Operating Plan, expense growth can Fiscal Year 2001 Expense bv Comoonent be examined by component. Personnel expense, including annuitant wsts makes 2900 2001 x up the largest growth segment of the FY Eetimete Pten Change Chage 2Wl’Operating Plan, at $2.4 billion. Growth Penonne, in salaries and benefits is the result of labor 49,453 51.875 2,422 4.9% conkacts, health benefits and other pay Nonpersonnel 0,772 S.iS? 1,015 11.6% related expense drivers, and not a result of 4,738 4.6% growth in work hours. Nonpersonnel ~e~w~*t’on WJ) -9.8% increases of $1.0 billion, or 11.6 percent, lA82nAwLul 125% retlect a commitment to upgrade services Tote1 Expenu 64,781 00,495 3,624 5.6% and infrastructure. The single largest component of the nonpersonnel expense is (S millions) depreciation, which is expected to increase by $207 million, or 10 percent. Spending on programs such as Point-of-Ben&i (POS) ONE, DOIS, and eCommerce drives the remainder of the inCrease in nonpersonnel expenses, Total transportation expense will decline by S-40million. This is below historically allocated inflation due to BPI initiatives and improved transportation ef6ciencies.

COST REDUCI’KIN PROGRAMS

A total cost reduction of $1 .Obillow is budgeted fw N 2001 with about 45 percent of the savings derived from specific programs and the remaining 55 percent from breakthrough productivity initiatives at the field and headquarters level. 01 the total cost reductions, $950 millii will come from the 6eld and the remaining from he&quarters and servicewide activities.

The vast majortty of proQram specific savings are linked to new OTenhanced equipment and software that will enable the workfww to be more efficient. Programs to enhance smting capabilities account for 83 percent of progs-amcost reductions and for one third of the total cost savings. Investments in programs to reduce letter-sorting cost will result in cost reductions of $245 million across all function6 in FY 2001. Programs to reduce flat-sorting costs will result in wst reductions of $146 million, and material-handling investments will produce a cost reduction of $74 million across all functions in FY 2001.

A total of $750 million is allocated to breakthrough productivity initiatives. Operational areas with the greatest opportunity for achieving productivity cost savings have been identiied using BPI pilots sites during FY 2000. Management established operational improvement targets and developed a comprehensive metric system to provide the areas and plants with data related to current performance

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levels, improvement opportunities, and ranking relative to similar operations. Best practices have been _ developed for national use. Through this Cost Reduction Proarams effort savings of $250 million in mail ACllYll” Cost---. S.--r1np* rot,, processing operations, 5145 million in Pr0gr.m‘: delivery operations, and $54 million in FI.1 NIlI Progmm I 143 customer services are expected. Other Ddlrwy awcoda Sortw Prop,,,,, 131 BPI savings include $100 million each in Ind~nlttisrtion awcod* Son ProSr,m .s transportation, suPPlY chain R*mot* Computw R.ad 2000 Proprm!~ 3* management and administrative n.y N.n*p.m.nt Syttm .3* activities. Recognizing the dtfficulty in RemoteEncodlnp Cwbtbr Conrolldatton 25 RobotIs. I* achieving the aggressive cost Automatic *Irlln* Asslmm*nt Prooram 14 reductions in FY 2001. the first Year of Nail Trmsport Equlpmkt S.nis.k.nt.n SPI. a 5200 million ftetd reserve has Smrll P.m., .nd Bundl. Sort., Propnm II been allocated. s 473 The goal-t nfof the BPI transportation 60 too initiative is to optimize existing ,PO transportationsGati:n while maintaining or

savings of 572 million will be realized. Trailer lease program costs were reduced $2.1 million through a reverse auction. Fuel cost savings of $25 million will be achieved by. maximizing purchasing power on up to 560 million gallons of fuel to be bought in bulk for use by both highway contracts and private vehicle services. The supply chain management target will be achieved by using best-inclass purchasing processes. This effort includes national supply purchasing via the Internet and re-negotiating contracts by working with suppliers to achieve more efftcient product design, usage and delivery schedules. Administrative savings will be achieved by limiting the growth in program support, consolidating other activities, and reducing personnel where appropriate.

PRODUCTIVIW

Total Factor Productivity (TFP) measures the change in relationship between outputs and all resources used in producing those outputs. Labor productivity measures the change in relationship between outputs . (mail votume and delivery points) and the labor INTEGRATED FINANCIAL PLAN FY 2001 resources used in producing those outputS. It is not unwmmon for TFP grcMh to fluctuate from one year to another. Over the tong run, a successful organization will average positive growth in productivity.

The output measure is the mail vdume processed and delivered, and the number of delivery points sewed. The TFP measun, takes into account workload factors such as size (e.g.. letter, parcel. and magazine). preparation (e.g.. prebarwdtng and .‘.I ,,” ,,,, ,,,, ,,” ,,,, ,,,, presorting), and service (e.g., Priority, First Class, or Standard mail). The resource measure is composed of all of the labor, capital and purchased goods and services and materials used in providing services and supporting operations, including all equipment, facilities, transportation, other nonpersonnel costs, as wetI as indirect costs such as headquarters expenses. During fiscal year 2000 labor productivity grew

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2.1 percent. TFP grew by 2.4 percent, which is equivalent to $1.5 billion in expense reductions. This is the highest productivity growth achieved by the Postal Service since 1993. Cumulatively, since 1990 TFP has improved 1.7 percent. Management laid the grcundwork during the 1990s through investments in infrastructure upgrades, automation and mechanization. to achieve strong TFP growth. The result of these investments is reflected in the TFP growth rate for FY 2000.

When compared to other years with strong positive TFP growth, the achievement of FY 2000 is signiftcant. During the 1990’s TFP grew, on average, 0.2 percent annually while workload grew 1.9 percent, on average, annually. In 2OGO.TFP growth of 2.4 percent was achieved in spite of a below average workload increase of just 1.7 percent. In earlier years, strong TFP growth was fueled largely by workload growth. In FY 2000, strong productivity growth was fueled by substantial restraint on resource usage. Work hours declined by 0.7 percent and materials use fell by 4.4 percent.

The FY 2001 financial plan assumes a 2.0 percent increase in labor productivity and a 0.7 percent TFP growth rate, Withwt this productivity increase, the net loss would be approximately $430 million greater. The FY 2001 financial plan calls for greater expense growth thah in recent years, while total workload resulting from mail volume and deliveries changes will show minor growth. The expense growth and planned capital investments offset work hour reductions to yield a 0.3 percent net decrease in resource use. Mail volume for M 2001 will be approximatety the same as FY 2000. though the mail mix will shin to one with less workload content. Delivery points will grow approximately 1.5 percent, which is slightty above average The combination of mail volume and delivery changes will result in a workload growth of INTEGRATEDFlNANCtAL PLAN FY 2001 only 0.4 percent, challenging positive TFP growth.

The labor productivity growth estimate for FY 2001 of 2.0 percent in FY 2001 results from planned work hours at 1.5percent betow FY 2OGO. When ccmbined with labor mix changes, the work hwr reduction yields a 1.6 Percent decrease in labor use in the 2001 plan.

Work&taring discounts that were introduced in the 1970s and 1950s. and increased in the 1990s provided cost savings for the Postal Service and customers, but impact potential TFP gains. These incentives shift a portion of the workload asscciatf with automation compatible mail to business mailers. While improving the nation’s economy as a v lmte. some of the prime productivity improvement opportunities are thus transfmed from the Postal iervice. As higher and higher levels of efficiency are achieved within the mailing industry, increments productttity improvements become more and more challenging.

Achieving the FY 2001 TFP target will require continuing active management of resource utilization against actual votume and delivery point growth. Recent trends suggest the Postal Service is on the right track.

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The Fiscal Year 2001 Capital Plan totals $3.6 billion. 1, The Capital Plan wnsist if investments in high return FY 2001 CAPITAL INVESTMENT PLAN on investment programs, improvements to facilities. major engineering efforts, customer service programs, and provides funding for eBusiness initiatives, Invsstmsnts that: technological infrastructures, and information platform II l Improve Quality of Customer Ssrvlcs I projects. A new five-year Capital Plan has been n Allow for Aggressive Cost Management presented to the Board. II a Incrssss Preductlvlty Gains through I

CAPITAL PLAN HIGHLIGHTS

The capital requirements will support the Postal 1 Services’ strategic objectives. Investments will be made in programs (0 ease customers’ business contacts with the Postal Service. The plan includes programs that will improve the quality of customer services and increase oppwtunities for revenue enhancements. Infrastructure investments will be necessary to support workload growth, to repair or replace aging assets and to provide necessary information and communications technology networks. The Postal Serviie will be applying technology lo achieve mote aggressive cost management, to gain efliciencies, and to improve productivity. Automation and mechanization projects will be applied to distribution, processing, and delivery systems.

Specific plan commitments of funds illustrate these strategies. Funds for new distribution equipment will reduce material handling costs, important to our cost management strategy. Funds are allocated for commitments for 10 major mail processing and distribution facilities and for over 300 small facility projects identified by the area vice presidents for commitment in FY 2001.

In accordance with the long-term vehicle plan, the plan includes funds for 2.200 mixed delivery and collection vehicles, 1,250 cargo vans, and 375 lruck tractors. The plan funds Point-of-Service (POS) ONE, next generation flat sorting machines, and robotics.

FY 2000 CAPITAL INVESTMENTS

Durina FY 2000. the Capital Plan was adjusted from r I $4 biGon to S3.i billion: However, this &s the fmh INTEGRATEDFINANCIAL PLAN M 2001 consecutive year that the Postal Service has had stud Capital Commltm*ni8 capital commitments of OVBT$3 billion. During 2000. II II the Service completed nine Board approved projects AutomrUo”lMoch8nir8Uo” 1,001 totaling more than $571 million. Of these nine II 1.336 II projects. seven were equipment projects and one was a facility project The remaining completed project was the Mail Transpmi Equipment Service Centers. In FY 2000, the Board approved a total of $1.6 billion for 20 new major capital investment pmjects.

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FY 2001 CAPITAL INVESTMENT PLAN

The M 2001 Capital Plan totals $3.6 billion. With its strong focus on technology. this plan will support aggressive cost management efforts by promoting automation and modernization projects that affect the distribution, processing, and delivery of the mail. This plan also includes programs that will improve the INTEGRATED FINANCIAL PLAN FY 2001 quality of customer services and promote revenue growth. In addition, management will continue to M 2001 FY 2001. O! $3.6 Billion $221 0.7 X UT Sl7.S Billlo make investments in infrastructure to support continuing workload growth. repair OTreplace aging assets, and build the information technology network needed to develop new products and services while delivering the highest quality customer service.

To minimize borrowing, projects are funded with cash flow from operations as much as possible. I-, According to Postal Service bylaws, the Board of Governors must approve the capital budget each year. This approval represents a general concurrence with the Capital Investment Plan. In addition, the Board approves all investments greater than $10 million.

All projects in the approved plan are subjected to an in-depth review and approval process that ensures they are fiscally sound or service oriented. Acuxlntability is established for the results the project is expected to produce; and the project analyzed using a Return on Investment methoddogy to ensure that projections are accurate. Finally, studies are conducted on selected projects, to determine whether financial and operating goals are achieved.

By committing mme resources to revenue generating activities, this capital investment plan reflects the focus on a high return on investment and infrastructure projects, as well as funding eBusiness initiatives, technological infrastructure, and information platform projects. The current pottfolio of capital investment opportunities will produce an estimated return on investment of approximately 16 to 16 percent over five years. Capital investments will consist of improvements to facilities, major engineering efforts and customer service programs. Major programs and projects in each of these categories are described on the following pages.

Equipment The FY 2001 Capital Plan for equipment is $1.3 I. 1 billion. Automating an increasing number of functions, INTEGRATED FINANCIAL PLAN FY 2001 allows the Postal %-vii to reduce costs and improve performance. Automated equipment not only saves work hours and associate-d indirect costs but Y.,.~l.l “mdung also delivers faster, higher quality service. The . I..“.,. investments in automation and mechanization are . P*rS.Is essential to the goals of strengthening our financial viability by managing costs and increasing revenues.

Automation provides management with data gathering capabilities that can be used in future information-based services. For example, the material Percent of $7.4 Bllllon Equipment Plan handling systems will be able to be integrated with the Next Generation Small Parcel and Bundle Sorting Machine that utilizes optical character readers and video encoding to process over 11,000 pieces Of mail per hour.

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Investments in the Delivery Barcode Sorter Input/Output Subsystem (DIOSS). a universal modification kit to be installed on all delivery barcode sorters (DBCSs) lo improve the capacity, speed and accuracy in which letter mail processing equipment reads, processes and sorts mail, will continue. The Parcel Sorter Singulator Scan Induction System will be installed on all Bulk Mail Center parcel sorters to improve the capacity, speed, and accuracy in which parcel mail processing equipment sorts the mail. Adding 175 Automated Flat Sorting Machines (AFSM 100) will improve periodicals and flat mail processing.

~~i,,~~ :.;T 2001, $1.1 billion will be committed on facilities. These improvements are necessary to keep up with INTEGRATEDFINANCIAL PLAN FY 2001 growing population, increasing mail volume, and changing delivery points, as well as to repair or Field Customer Service Projscts replace aging facilities. However, rather than build new facilities, management will optimize use of Major Mail Procssslng Facilltles existing space whenever possible. II Field Repair 6 Alterations ;,mlo~~~nJal Estate 35 / average, an&ally, the customer service projects comprise the biggest portion of the facility plan - IO 31 percent of the FY 2001 plan and 37 percent of the five year capital investment plan. There are a total of 1 23 separate major mail processing facility projects in I’ the five-year plan. Of these, 10 major mail processing facility projects will require Board approval in FY 2001.

To maintain current facilities, ongoing repair and alteration projects equal 37 percent of the FY 2001 facilities elan and more than 36 percent of the total for five years. This is greater than the plan for mail processing facilities.

Infrastructure projects maintain and meet the communication. computer and transportation system INTEGRATEDFlNANClAL PLAN FY 2001 -a FY 2001 MajorInfrsswucturs Proj*cts needs. The FY 2001 Capital Plan for infrastructure is II $610 million. MWlh 87 In order to improve mail processing automation and B Delivery Opsrrtlon Informstlon SyS. 83 develop future customer services, it is necessary to improve data cdlecdion and management Suhcs 6 Alr Yansgsmsnt Sys. 35 capabilities. This imludes developing the ability to identtt and track individual pieces of mail, alone and Structured Wiring 35 in unit loads. The Mailing Evaluation Readability and Lookup Instrument (MERLIN) can improve the ‘.LI consistency of mail acceptance and design robots to I read address and indict. vere meter amounts and weiah and measure the thickness of mail. The Ddivery Operations Information System (DOIS), whi& replaws two legacy systems, will reduce work hours by providing supervisors with actionable data on available resources to handle daily workload.

The Surface and Air Management System (SAM) will improve cur ability to control air routing and air transportation costs. Final Draft 11/03/2GOC

Vehicles For 2001, an investment of $335 million in new vehicles will be made. This includes projects for mixed delivery and collection vehicles, cargo vans, INTEGRATEDFINANCIAL PLAN FY 2001 a and carrier route vans. The Postal Service’s award pI FV 2001 Maim Vehicle Proiactr winning alternate fuel program requires continual Mixed Dellvery and funding to comply with federal, state and local Colktlon Vehicles 103 transportation regulations. Cargo vsns 76 Consistent with the long term vehicle plan, Lo”@ Life Vehicle management will request approval for the acquisition Shelvln@ Mediftcrtlons 29 of 2.200 mixed ddivery and collection vehicles, 1,256 cargo vans, 375 buck tractors. and shelving Truck Trsctora 20 modtfications for one fti of deployed Long Lie . “w.., Vehicles (LLVs) in PY2Wl. The Capital Plan will continue to replace vehides that have exceeded their useful life. while addlng to the fleet in order to cover growth in delivery points. The shelving modification is an improvement to the existing vehicle model. and contributes to our ability to better manage the changing mix of the mail within our current vehicle capacity.

Retail In 2001, $236 million will be committed on retail INTEGRATEDFINANCIAL PLAN FY 2001 capabilities. Over 90 percent of this amount is’ earmarked for Pointof-Service (POS) ONE. When fully deployed, POS ONE will capture detailed sales and customer information. This, when integrated with the technology platform will reduce eccounting Self Service Vending Equipment workload in district offices, integrate debit/credit card functionalitv. Drovide inventoCY manaDement. enable automatic reordering, and provide post of& box Contract Retall Operations 3 II administration ability. 11 DeeCreditVARS 2 // Investments in new postal booklet stamp vending machines, and new stamp vending machines with debit and credit payment capability will be made

eBusfness The Postal 6ewii is now investing in eBusiness technotogies to continue the proud tradition of INTEGRATEDFINANCUL PLAN FY 2001 providing universal sBcv/ce in the Internet age. The fgFT. goal of eBusinees is to provide new Internet based Internet lnfrsstructure 10 products and services for customers, enhance features and access to core postal products. and Mailing Online 5 improve information about Postal services. eBusiness l Business IT Infrastructure 4 initiatives are categorized as eCommerce, &ervice, ePeople. and Infrastructure. eBusinoss Security 4 eCommerce Enabling Supporl 3 eCommerce initiatives are new intemet based products and services for consumers, businesses and 1”h government entities that generate revenue for the Postal Service through user license fees. eservice - initiatives will enhance features, access, and information about core pmducts and services. ePeoPle

16 Final Draft 11/032C00 efforts will keep employees better informed, provide a full range of “self service” items, reduce administrative tasks, and increase access to developmental opportunities. All will be supported by an infrastructure that links our core production processes, parallels the hard copy flow of messages, merchandise and money, increases the convenience of retail transactions currently done at a post office and allowS for new electronic products, services and choices to be offered to our customers.

The Internet and eBusiness infrastructure programs include several projects designed to get eBusiness off the ground by providing the infrastructure ‘backbone’ needed to compete in the electronic arena. Mailing Online enables small businesses and other mailers to use the Internet as a channel to access information and services related to First-Class and Standard (A) Mail. eeusiness security will provide a strong security architecture designed to protect the USPS networks, platforms, and mission critical etectronic business applications. Enabling support for eCommerw will be developed using Internet Shipping Solutions, which offers a suite of shipping tools that extends existing USPS products. services. and information to the Internet.

Research and Dewlopmant Kev research and development projects focus on I, I research into operational. areas -th;t will lead to reduced costs and improved customer service. While 52 Research and Development projects are generally expensed, the fotlowing programs till be capitalized wnsistent with current accounting practices: Automation Support

Automakvi Sup& provides software development for the National Directory Suppcft System, the oftIine automation support for mail processing activities. 1 ~~i~~~~~ i 1

The Flat Bundle Collator program extends the deqlopment of a prototype flats ddivery sequencer for large carrter stations.

Material Handling Robolics supports the technology transfer of commercial robotics applications into ti Postal Service environment.

Relal Outlet Altarnatives explores the low wst alternatives for providing customers convenient access to postal products and services.

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As reflected in the financial outlook on page 23, an estimated $2.0 billion in new net borrowing will be INTEGRATED FINANCIAL PLAN FY 2001 required in FY 2001. The financing picture, as shown, g mPic.“rm contains four interlocking pieces: cash on hand, cash flow from operations, capital cash outlays, and borrowing (or financing).

A change in any one piece requires an offsetting change in one or more of the other pieces. The annual change in debt is determined by the interaction of cash flow from operations, capital cash outlays, and changes in the cash balance. In addition, capital cash outlays often dkfer substantially from capital commitments that do not immediately II affect cash. Taking a longer-term strategic view, management increased the year-end cash balance in N 2000 and plans to increase cash by $200 million in FY 2001. Given the financial uncertainties that the Postal Service will face in the next few years, a modest increase in the year-end cash balance is a prudent strategy. This action translates into higher balances entering each fiscal year, providing the Postal Service with increased flexibility.

The strategy of minimizing cash and debt has not changed; it has only been refined where cash balances on the last day of the fiscal year are wncemed. Management will continue to minimize cash and debt on a daily basis.

The financing needed in any year remains driven by the difference between cash flow from operations and capital cash outlays. When cash flow from operations has been greater than capital cash outlays, the Postal Service has reduced debt. In recent years, cash outlays for capital have exceeded cash flow generated from operations, and debt has increased. In other words, Mowing occurs when capital investments cannot be entirely financed through internally generated funds.

In FY 2001 the Postal Service expects $3.5 billion in cash outlays for capital purchases and cash Row from operations totaling $1.7 billion. These cash Rw combined with a planned increase in cash of $200 million will produce a borrowing requirement of $2 billion for FY 2001. Borrowing the full amount requested would bring the debt outstanding with the Federal Financing Bank (FFB) to S11.3 billion.

Due to ective management of credit lines, the average debt outstanding during the year will be far less than the year-end balance. The average debt outstanding will increase to $6.9 billion in FY 2001 from S4.7 billion in FY 2tNO and FFB interest expense will increase to 5430 million from 9270 million. Risks to the net income plan translate into risks to cash flow from operations and could adversely affect borrowing and liquidity. Final Draft 11/03/2OOG

The FY 2001 Integrated Financial Plan is the product of an extensive development process, during which numerous Scenarios were examined. Management has established a firm foundation for the achievement of the plan. Aggressive actions to manage expenses in response to the lower-than-expected volumes of FY 2000 have been Successful. Because the $480 million net loss in the FY 2001 plan is minimized, there is minimal reserve for unforeseen events. Abundant risk factors must ba acknowledged and some of these are discussed below.

Rewnue Mail volume and revenue Qrowth fetl well betow planned levels following the January 10, 1999, rate increase. Historically. mail volume growth has tended to dip after a rate increase. Other factors, such as experimentation with alternate advertising media and the migration of mail toward lower-contribution categories may have exaggerated this normal post-rate increase slowdown in growth. Management believes the zero volume growth plan reflects this recent experience. However, acceleration of these trends could result in volume declines. Additionally, the plan includes $304 million in revenue from new initiatives that carry some degree of uncertainty.

The plan assumes the Postal Rate Commission will return a decision consistent with the rate request. Should the PRC return a substantially different recommendation, the ability to achieve the FY 2001 plan will be materially impacted.

Economic Risk Significant dangers and risks characterize the Postal Service’s economic environment, as FY2Wl begins. Oil prices have risen from a low of $10 a barret in 1998 to over $36 In October 2000. As labor markets have tightened and capacity has become strained, concerns about mounting domestic inflation, have moved the Federal Reserve to raise interest rates. Economic growth may be poised to flatten. Significant economic change could negativdy impact postal operations.

Productiviiy Impmwments Significant savings from Breakthrough Productivity Initiatives are built into this plan. They are challenging but achievable, and operations management has developed specific strategies for their achievement. These strategies center on the capture of the savings opportunities afforded by improving on plant, detivwy. and customer service operations by applying pedormanc8 management concepts, identifying and distributing best practice toois and standard operating procedures. Economic utilization of the transportation network are also LarQetedfor improvement.

Labor Arbitration Three labor contracts come up for renewal in November 2000 -the American Postal Worker’s Union, the Mailhandlers. and the Rural Canters In the absence of an approved contract, labor rates for these three union Qroups were estimated based on the expected Employment Cost Index (EC& Should the negotiations produce a substantially different outcome, the ability to achieve the FY 2001 plan will be materially impaaed.

Significant regulatory charges for the truckin industry are now being proposed and could be effected in FY 2001. The changes relate to the number of hours worked and days off. These changes may add additional expense to Postat Service operations. Management cannot predict any financial impact at this time as no changes to existing ragulabons have been adopted.

A continuation of FY 2000’s adverse workers’ compensation trends in FY 2001 could drive those costs beyond the optimistic estimates included in the plan. Management betieves that the accelerated claims processing has a one-time impact that will not continue over the course of FY 2001. However, the increase in reported injuries, dispropodionatdy attributable to occupational claims filings. may have a

19 Final Draft 1l/O32000 lasting impact on the number of medical and indemnity claims as well as the average cost per medical claim. This will adversely impact the workers’ compensation expense accrual, and could result in additional costs in FY 2001.

As always, the potential for the Occurrence of unplanned events, such as natural disasters, that could adversely impact the Postal Service’s finances, must be acknowledged as a risk.

20 Final Dra9 11/03/2ooO

In 1999. the Board of Governors adopted selected financial Indicators for their use in setting financial pohcy for the Postal Service. The three areas of financial performance are: financial margins, capital structure and efficiency These are now monitored with the aid of the Indicators listed in the Tables betow.

r INTEGRATEDFINANCIAL PLAN FY 2001 II

FINANCIAL INDICATORS

These selected financial Indicators. with their specific targets, offer the Board and postal management the opportunity to gain sharper focus on financial performance. Taken together, these Indicator targets frame the planned Postal Service financial results for M 2001. The Target for each Indicator originates in and corresponds to the specific policy for each financial area that has been established by the Board. As illustrated in the tables on page 22, the indicators and targets are the framework upon which the Integrated Financial Plan is built. The FY 2001 Integrated Financial Plan produces operating margin and CAPEX results within recommended targets. Recovery of prior years’ losses is also highliQhted here as an integral part of the capital structure.

The Integrated Financial Plan produces an operating margin result of 2.3, which is SliQhUy betow the recommended indicator taqet range of 2.5 to 3.5. Operating margin, defined as operating income divided by revenue, measures perfwmance in areas in which management has the most controt.

FY 2001 is the third year of the R-97 rate case that assumed price increases would occur in FY 1999. Considering that the imptementabon of those rates was detayed until January 1999, the reduction in the recovery of the prior years’ Ices provision from 9939 to $377 million, and holding further price increases until January 2001, these results are reasonable. Final Draft 1 l/03/2000

HISTORICAL RESULTS OF FINANCIAL INDICATORS

The cash flow to capital expenditures ratio is calculated by dividing operating cash flow by capital cash expenditures. This defines the level of capital expenditures to be financed from internal cash perrting Margin generation versus external financing. For the FY 2001 capital structure, a CAPEX result of 49 will be produced. This is on the low side of the targeted range of but it represents a small increase over FY 2000. which had a CAPEX ratio of 47 percent.

The charts to the left and below, reflect the historical results of these indicators for F’f 1995 through 2001. Also included on the charts is the recommended range for these Indicators.

INTEGRATED FlNANClAL PLAN FY 2001 INTEGRATED FINANCIAL PLAN FY 2001

Cash Flow to CAPEX Ratio 200

04 I999 090 1991 1999 1999 9000 2001

This plan will consume a portton of the progress made on the recovery of prior years’ losses in relation to Board Resolution 95-Q. Due to the accumulated impact of eartier net ikomes that exceeded annual targets, the Postal Service will enter FY 2001 an estimated $1 .l billion ahead of the cumulative target. Based on a projected $490 million net loss in FY 2001 and the $295 million annual prior years’ IOJS recovery target, Management eJtimateS finishing FY 2001 $330 million ahead of the cumulative target.

22 Final Draft 11/03/2WO

The financial plan allocates resources to achieve corporate goals, strategies, and targets. The plan has three components - the Operating Plan, the Capital Plan, and the Financing Plan - and these are incorporated in this financial outlook. The outlook through 2002 assumes that the Postal Service will implement the pending 6.4 percent rate increase request on January 7. 2001.

The net losses projected for FY’s 2001 and 2002 are driven bv increases in labor wsts. Cost oer workyear- increases (wages and benefits) are estimated to average 5 percent per year over M’s 2001 and 2002. This rate of labor cost growth Net Incorn. reflects acceleration in the growth of labor costs in D.pncistton Adjustments the economy as a whole as measured by ECI, and Cssh Flow From Operations the impact of the city canter contract arbitration award that drives labor cost increases above ECI in FY 2061. This 5 percent growth rate is more than double the average 2.2 percent labor cost growth rate experienced between 1995 and 1999 when the Postal service earned accumulated net inwmes of $5.5 billion. If this lower rate of wst growth had continued. the Postal 9ervii most likely would be predictin net inwmes instead of net losses.

For FY 2002. there currentty are no contracts with the major craft unions. In the absence of agreed to contracts, labor costs are assumed to increase by ECI-1 in FY 2002.

The chart above shows the crttical etements of the financial condition through FY 2002. The first fwr lines of this chart refiect the generation of cash flows from the Operating Plan. Net income, depreciation and other adjustments are the sources of cash flow from operations. The next line in the chart is the capital cash outlay. This represents the cash disbursements necessary to fund capital investments, The difference behveen cash flow from operations and capital cash outlay is the amwnt needed to borrow, and that drives the Financing Ptan.

The remainder of this chart provides additional information on the Postal Service’s financial condition. Debt represents the expected outstanding debt at the end of each fiscal year thrwgh 2002. The capital commitment plan reflects the estimated new capital commitments in each year. The wuity amwnt is the sum of contributions from the federal government and prior years’ losses, shown in the last line of this chart.

Board Resolution 959. concerning restoration of equity and recovery of prtor years’ losses, estabtished a poticy of planning for net incomes that ‘equal or exceed the cumulative prior years’ loss recovery target* set in omnibus rate proceedings. Due to the accumulated impact of earlier net inwmes that exceeded annual targets. the Postal Service will enter FY 2001 an estimated $1.1 billion ahead of the cumulative target. Based on a projected $460 million net loss in FY 2001 and the $295 million annual prtor years’ loss ,rewvery target, the Postal Se&e will lose QrWtId. but is still estimated to finish FY 2001 $330 million ahead of the cumulative target.

Resolution 95-Q provides that if it appears that the projected target will not be met, the Board and management Iwill take acttons that reduce costs and/or increase revenues.’ It currently appears that the equity restoration target will not be met in FY 2002. Consistent wlth this directive, management’s preliminary FY 2002 cost projections include approximately $1.1 billion in new cost reduction, primarily relating to breakthrwgh productivity initiatives. The FY 2002 projection also reflects cumulative new initiative revenue increases of approximately $400 million. It is clear that another omnibus rate case is on the horizon.

23 A-ITACHMENT III OCAIUSPS-m-7

CONFIDENTIAL

I.P. htal7ml smuifia k To: Richard J. Strasser Chief Fiial otlicer United StatedPostal Service

From: winthropwptscm ManagingDirwtor

Date: August 3,200l

Subjectz Debt

JPMorgan has been asked by the United States Postal Service to wosider its debt in the context of debt levels for private sector companies. This letter m thekeymesssgesinaualyzingthe Postal Savice’s deb& descrii tbe mk of dabt for private sa+ coInpan& ccmpam tboso companies to the Postal Savice, and discussesmethodologies for the Postal Serviceto evaluate the difficult bade-offs i&mat in debt fioancing.

JPMorgan was not asked to focus specifically on retiremeot aad leasing obligations, however, your ~ando~alpathattbeincluJionoftheiimpactonu9hflowisaa~rspatofa comprehensive debt analysis.

KEY MESSAGES . Comparisons of appmphm debt levels for the Postal ssvice to private sector compaoies are diftkuk Wiiout market-oriented prwnues related to equity raum~ and debt costs, cupomte finance thawies that guide optimal equity and debt rehtionships for privrte sector compsnies cannot readily be applied to the Postal Service. . Long-teml fomcutiag aad nGtcd seositivity aoalysu are iIllpoltaIlt to help clafify the bade- offs btwwn rates, investing, cast-cutting, bomvimg, and repaying dabt l It is possible to d&i substitutes for markat wnsbaints that could provide dabt level @b-. l l&e Postal Service’s mauagementand Bosnl of Govemors need to apply their judgema to detWmiaetargudebtlevelsfortheogrnintioaonaaongoingbasis. l If~P~servieedetsmri~~iDorrrssdborm~boyondthodcbtcsilingisnecesruy, ream&b arguments could be made to Congress sod appropriate constiWats.

PRIVATE SECTOR COMPANIES lltegoalofprivatesectorcompaniesistomaximize the value of equity fbr their sbrrcbolders. The development of financial policies that Wance m levels of equity end de& iu the capital stmctmz is a complex pmcess subject to coosidaable judgement or “art” in addition to the more objective ‘Science” of staodard p~vametersset forth by markeb or corporate haaw theory. ‘Ibe relevant factom Ewsidered include the finaocial pnqects for the company, the qected ability to pay interest aud repay debt, the availability and cost of equity and debt, as well as the risk 0 JPMorgan

Page 2

toleraoccs of the shamholdersand debt holders. TIC balance between debt and quity caa be a key driver of stock market valuation.

Debt has the potential to magoi@ risks and returns to quity shareholders sod divides the risks and mtums of ownership betwacn shareholders sod leadas. When companies are profitable, interest expense. which is tex deductible, can provide a tax sbicld tbat enhanceseamiogs. The availability and ma&et cost of debt are aitical components in determiniag appropriate debt levels. Market cab of de& rise as a company’s risk of insolvency iwuses, and incmued debt increaseatbe risk of iosolveocy. Provided tbat returns to the compaoy exceed the principal and interest costs of dabf the additiw of debt cao magnify eamiugs available to sbsreholders. Coovasely, debt can magnify losses and reduce shareholder woiogs if compsoy retums do not exceed the principal and iotarest costs of debt.

Debt cqmd@ and optimd quitalsmcttm Compania use several methodologies to evaluate tbeii overall debt capacity and their optimal debt levels. Key tools io these evaluations em foRcasts ~proj~t?cwciolpcffonnanwbawlon~ prospective balence sheets,iocome statements,and cash flow statements. These forecaststake iat0 account expectedprices VOlUmsS,expenses, invesbnmtr, aquisitio& efficiencies, pota&l asset sales, wmpetitive dynsmics, mameconomic coditions, the availability sod cost of quity and dew and otbu felevsnt infowation. Generally, multipIe scenariosare fomcaedtoassw3tbe potential for t%tumresults to vary tium base case pmjectioax Maoagcment judgemeot, howzver, is ultimatelymquiredtobalaacetherisksandrwwrdsofdebt l Debt capacity measureshow much debt a company can savice (Pay interest and repay principal). Forecasb are usal to estimate the pomtial cash flow available to service debt, and therefore the maximum amount of debt that can be bomo. l companies apply corpm%e fin;lrrcc theory to wrive at tbeif optimal capital structure. These tkories an built on balancmg tbo ma&et costs of equity and dcb& tbe value of the tax shield, and tbe risk tolerances of shambolders, de& boldas, attd mauagement to cm&e the lowest cost cdpital stmctwe for tbo company. In effect, wmpauies brluree the benefti of levemgeand the turJhield~tbc~ofdLbt,thepo~~costrof~,~dthedtsirctom~ accessto additional tinawing at reasonable cost

&pate fhanu theory impliss that companies witb safe, hngible assetsand tmcableinrxme to shield should have an optimal capital sbuctum that relies more bewily on debt Less profitable companies with risky, intangible rssetr should have an optimal capital -tbatrSliC3ltss heavily on debt financing

OeaW PM, ast of &bt and wcss to debt cophI Credit rating agencies, swh as S&P and Moody’s, we basic forecastsas a tool to compare companies’ ability to service their debt. The baditi~nal letter mtings loom each agency @AA. Baa, etc.) imply probabilities of,default and recovay. obese guide investors to appropriate debt pricing e JPMorgan

Page 3 sod availability. Compsnies oftan use credit ratiogs as key inputs io balaacing debt levels with cost effective market access. Whoa a wmpauy’s actual perfomag~cofalls short ofexpectations aad issues arise about the ability to service d&t, wedit ratings fall, cost of debt tisw, and somet&s awoss to debt ends.

In these cirwm~ companies tutu to mom complex tinawing teclmiqoes to supplemeot tboit cash flow. limo tccbniqoes ioclode assetsales aad secural tinattcing mcturcs such as leasing ox stmuikdion rolatod to rod mate, equipment and other assets. Dspa~ding on tbo circ~~~~stat~c.~, these banaction. can be mom cost cffwtivo tbm other altumtivq provide more fiaancbg capacity than oasecured debt, and sometimesprovide aceus to fuuncing in times whao equity aad debt markets am buccassiblo.

We have highlighted credit sbti$ics md othct fiasacial iafotmation for several compaoies in Appendix I; these companios ioclude UPS, FalEx, swatal large wnporatioas witb ruvetmas0~. other attributas similar to the Postal Suvkx, sod the TeooessecValley Authority wbicb is a governmat wrpmtioa that also has a Congrassionally-mandateddebt ceiling. The debt levels aad other iofomation show that wch compaoy has a somewhat di&ont Ihoming strategy. T&o key similarity is the choice to maintain relatively bigb c&it ratings. FedEx maiataim a lower iovestmeotgmdorating. Byoontrasr,UPSisoooofthofowprivrtcsectorAAAratedcompaniesin the world. TVA, a govcmmcnt Mporation that borrows io tbo public markets, has a higher ratiog ttiao its fituncial pafommnw wananti due to ita relatioosbip to the govemmeat Tt10tiaucing stramgieaof tbesa wmpanias include various dews of equity, d&t, Iaaaiog, assatsala, and other techniques. Witb &a mwption of TV& their corpomte stntdured are all very complex witb multiple bosmeasesin tbo U.S. sod globally. They ate all active in mergers, aquisitioos, joint veohuas, and stmtegic iovestmeots. THE UNITED STATES POSKU SERVICE Compsrisons of w debt levels for the Postal Service relative to ptivata sector companias am diftlcult to make. Wiiout matltot-otiwted prowura dated to equity mtmos sod debt costs relative to risk, the caporate 6nanw theories that guide optimal equity and debt mlatioosbips for privatasectorcuopauioacaoootbappliedtotbePostalscwica.

Many of tbeda compantivo limitations ata a result of the Postal Service’s staMo4y stnxhue. Uoder tJloclomtstaMwystNc~tboPostalswvioe:

. Hrrtbe~~~toborrowuptoS15billion~theFedanlF-ing~oftbc y-,~uury with atumal limits of S2 billion fat wital pwpoaes and St billion for

. Maintains tidl accessto d&t at a cost equal to tbo yield on cnnparablo matutity Treasuries plus 118%provided tbat it remains uodar its statutoty amnal sod total dobt limits but regardless of the fmaacial condition of the Postal Sewii. As of Septambat 30,2000, tha Postal Service’s debt payablo to tbo Federal Financing Bank totaled S9.3 billion. GJPMorgan

Page4

l OpOrwS for the bOwfit Of th0 AmOrb psople, ptiCUl0rly those using tbo mail services; it i9 not required to oun a rotum on equity, Ondcumntly mainths wg~tive quity.

l Is limited in tenno of fineacing options since it Cabot nir quity acid is supposedto k~&- even over time. Ihis kaves debt and. poteothll~, assetsales 0s the only unsecwd fmancing vehiclea to manage ush flow timing, accelemtcinvestmeat, andor supplementcash flow associakd with earnings shortfalls.

Given the cotits of tbo cmnnt $15 billion debt ceiling, maoagcmeotcan set a tinancial policy with an intemal debt limit at a level that pmvidu a safety cusbiw below the statukq ceilmg. If the Postal Service exceedsthe internal dobt limit, managementwill have to balancecost savings and investments in order to generatethe neessary oasb to avoid further botmwiag and to potentially repay debt Additionally, Postal Setvice managemat could emulateprivate sector companiw with limited &an&g altcmatives by considaiag tbe potenU for assetsaka or secured financiilg to raise cash.

F?ivatosector wmpmy financial forasstig tools cati also help dctetmii whctha mom 01 loss debt k&g is appropriate. We understandthat the Postal Service regularly engagesio this analysii for UIOpurposes of finaacial fotuasting and mte case prqantion. I’Ie forecasting and related sensitivity analyseswa help clarify tbe tradeoffs bchvceo rate% invcstin~ wst-cutting. borrowing, and repaying debt Tho impact of rctbcment obligatiotu, leasing, and other factors would be in&dad in tbo foecast@. In conducting such analysq other Postal Sevice specific issuesneed to be considered such as the need to mako low return investma~ts,tbo cdsb flow implicatkma of recovery of ptior years’ lossa, and con&gencies in new tatc cases. This process facilitates clear go& allowing for defendableroapoww to inquiries about tbo Postal Service’s invutmmt and fmaacing programs. Additionally, forarsting analysii helps tbo Posml Serviw determine its risk toluancc for debt io the cxmtextof its otbw decisions.

It through these or 0th mctbodologios tbu PostalScrfica detannk tlmt &teased borrowing ~dthodsbtcoilingiroccessry,rrsmn~~bem~toCon~mdappropriate rxmmtw& Several tationalos could be dcvelopcd such as: (i) tbo debt ceiling baa not grown 16th iotlatim ma oc the mvmuo growth of tbo Postal Son+; ifit bad, tbo wiling would now be ammd $20 billion; and (ii) tbo increasedborrowing is necessaryto achieve tbo Postal Serviw’s overill objcctivw.

Risksand mw?& efdobtfor t&r USPS ~oussofcwtuorctuapowafultaalto~inv~~~ Debtcanprovidec3sbfw invostma~t~in tie war mm that might bo undcsiilo or tmat&ablo through tates. Additionally, the timing of intmwt and principal paymentscan be matched to tbo timing of tbc expwtcd returns of the investmot~ts.Generally speaking,tbo invcsbnontawill be succes& iftbe -gate m- ._--,,-. -.-~-- oxcoed the aggqate wst of rho debt. Any additional benefits in tlm fonu of cost oficioncioa, enhanced service, etc. would -to the Postal Serviw and its wnstituents. Clearly, a critical .

e JPMorgan

Tho Postal Srviw’s tnaMgaualt aad Bead of Govmmn ncaistoapplyihjudgemmtto dcdamhOWgOtdCbtlOWlSf~thO~o0~ottgoiagbsrir. WhiloJPMagn~lienrit is hiblo to devise l methodobgy with substituk wosbhta that could provide debt Io~oI guid~forthOPoahlScnicqtheprsprntioa~dw~tbrtwou]dbersquiredus bOyoodthe timing aad scqm of this wak Appendix I: Comparative statistics

Company data aa of t&al year end 2000

BSlQiBBB FdEX 10,257 688 I.703 4.705 1,636 1,627 12,415 15.5 0.3 1.0 thlltodPlstcod AdAA4 6olvlcO 20,771 2.834 3.604 8,735 4,026 2.147 63,641 24.7 21.9 1.1

A&?lAA McDonaWa 14,243 1.877 6,474 0,204 3.049 I$45 37.700 21.1 7.5 0.4

WA Phi Motlia 63,270 8,510 29,122 15.005 11.23 1,662 100,435 12.4 14.1 0.4

AM/AA WacMorl 191.32@ 6.205 22.316 31.343 WI24 6.042 256,443 39.2 7.9 0.4

AZYA Al&T 65.881 4.669 60.749 103.19 15.90 14,566 66.648 28.0 2.1 0.2

Al/A+ V6fkW 64,626 10,610 57,328 34,578 26.50 17,633 147,504 10.2 5.9 0.5

TVA 6,702 24 25,377 4.051 1,444 667 NIA N/A 1.0 0.1 Unlted 6tatw NfA Portpl6OlViW 64.540 (160) 9,316 (646) 1,830 3,337 N/A N/A 0.4 0.2

w JPMorgan * Cash Fbv: Sum of Iwwne bebm exbw-dinary items, dapmcbtbn &I smwoMion anddefurodtaxw l Bloc&em 6/2/01 5 Timos lntimol Eamed = EBIT I Interest axpensa 1 -..,, . _ _ _ , ^ “, “,,* ,_,, 11” ,,, _,. Appendix I: Comparative statistics

Company data as of fircal year end 2000

FUJEX 16.257 688 1,703 4,765 I.838 1.627 12.415 16.5 a.3 1.0 United PuceI 6ardce 29.771 2,934 3.604 0,735 4,026 2.147 63,641 24.7 21 .g 1.1

Ae2lAA Md)wld’a 14,243 1,977 a.474 9.204 3.049 1,945 37.700 21.1 7.5 0.4

A2lA PhiliptdOlli# 63,276 8,510 29.122 15,005 11,23 1.662 106,435 12.4 14.1 0.4

AallM wawelt 191,329 6,295 22.316 31,343 9,024 6.642 250.443 39.2 7.9 0.4

AZ/A AT&T 65,881 4,669 69.749 i03.19 15.99 14,566 69,646 26.0 2.1 0.2

AllA+ VOliXOll 64,626 10,810 57.320 34,576 26.50 17.633 147,504 19.2 5.9 0.5

AmdAM TVA 6,762 24 25,377 4.851 1.444 667~ N/A N/A 1.0 0.1

N/A Postal serve0 64,540 (199) 9,316 (646) 1,630 3.337 NIA NIA 0.4 0.2

sougo: compllatal 1 Net Income: Calculated b&u axbaordinafy Items * Total bonxwed funds: the sum of debt in current UabiliUes and total bng h-m debt 0 JPMorgan l Cash Flow: Sum ol inixnm be&e e&W~diinry items, depmc%on and anwtizati and deferred taxes ‘Bkmmbe~6LMl 8 Times Interest Eamed = EBIT I Interest expense 1 ~- .- _ _ ~ _ _ .. . - - . - - -- _.-__ .- RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCAIUSPS-TM. The following questions refer to the FY 2001 investment plan. (4 How much of the FY 2001 capital investment plan was actually committed to in FY 2001? 03 Were all of the FY 2001 capital investment plan committed funds actually spent in FY 2001? If not, please provide the amount actually spent in FY 2001. (c) Were any capital investments incurred in FY 2001 that were not included in the FY 2001 capital investment plan? If so, please list them and indicate the amount spent. (4 Have any of the P/ 2001 capital investment planned expenditures been pushed forward to Fy 2002? If so, how much of the FY 2002 plan includes funds originally included in the FY 2001 plan ? If not, please explain what happened to the FY 2001 capital investment planned expenditures that were not actually committed to in FY 2001.

RESPONSE:

(4 In FY 2001, $1.2 billion was committed versus an adjusted plan of $1.6 billion. 04 No, Andyone would not expect them to be. Capital commitments are recorded in the year that specific project authorization is made. Actual spending is normally made in future years as projects are completed. Of the $1.2 billion committed in FY 2001, $236 million was actually spent in FY 2001. (c) No.

(d) Yes. $1 .l billion of the $2.4 billion FY 2002 capital commitment plan represents commitments originally included in the FY 2001 plan. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCARJSPS-TG-7. Please produce every study, analysis or plan for FY 2001 and FY 2002 relating to the appropriate level of debt financing for Postal Service capital programs and program initiatives, including the annual Integrated Financial Plan to the Board of Governors for FY 2001 and PI 2002 similar to the FY 1999 and FY 2000 plans in the record in Docket No. R2000-1 at Tr. 2/l 15-l 16.

RESPONSE:

Attachments I and II provide copies of the FY 2001 and FY 2002 Integrated Financial Plan. These~documents provide analysis of the required level of debt financing for each of these years. Additionally, Attachment Ill provides a discussion paper prepared by JPMorgan that considers debt in the context of debt levels for private sector companies. This is the only study on the appropriate level of debt that I am aware of. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCA/lJSPS-T6-6. Please refer to your testimony at page 15, lines 6-24. The testimony discusses cost reduction programs, many of which appear to be associated with significant investments and projected to attain savings over the next two years. Please provide planned and actual capital investments and commitments for the years 1990-2004 as available for land, buildings, vehicles, customer service equipment, postal support equipment, mechanized support equipment, and automated processing equipment in current year and constant year dollars. How much of each year’s investment is for improvements in quality of service? I:; How much of each year’s investment is for product additions? How much of each years investment is for cost reduction? How much of each year’s investment is for new capacity?

RESPONSE:

Actual and planned historical capital commitments by major category for FY 1990 through Accounting Period 12 of FY 2001 can be found in the Financial 8 Operating Statements. These reports are provided to the Postal Rate Commission and are also available in the U.S. Postal Service Library. Please refer my responses to OCAAJSPS- T6-3 and 4 for planned capital commitments.

(a-d) Capital investments are not accounted for according to the categories you have specified. The purpose of many capital investments typically relates to more than one of these categories. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCANSPS-TG-9. Please refer to your testimony at page 3, line 6; page 16, line 29; page 16, line 15; page 46, line 7; and page 50, line 6. The cited testimony mentions service, generally in reference to investment needs. (4 Please explain by type of investment project how the implementation of capital investment projects has impacted services and service standards. Please distinguish between improvements in quality of service, increases in types of service, and extensions of service to additional customers. (W Please define how the Postal Service measures service quality. Assuming that the answer to this question includes information on the number of days for delivery, please also indicate what other measures of service are used. (c) If service has improved, please explain how investment projects have resulted in service improvements; please give specific examples. (4 If service has declined, please explain how investment projects have resulted in sewice decline; please give specific examples.

RESPONSE: (4 At page 3, line 6. I was referring to both the quality and scope of service and did not have any specific investment projects in mind.

At page 16, line 29 and page 16 line 15, the reference is to improve the quality of sewice, and improved service can take on the form of greater speed, better reliability, improved accessibility or improvements in any other attributes that our customers value. Essentially all capital investments of whatever type contribute to one or more of these areas of improvement. I have not distinguished capital investments by each. To the extent that I have discussed service in my testimony in relation to capital investments and the capital freeze, the emphasis is on the need to have an adequate capital investment program to supply productive capacity and be in a position to serve our growing delivery network. Freezing our capital program impedes our ability to serve customers and that is why I refer to that freeze at page 46, line 7 as a “stopgap measure.” I specifically refer to universal service at page 50 line 6, because our universal service obligations lead to a continuing need to increase facility, vehicle and infrastructure regardless of whether mail volume grows or declines.

(b) The Postal Service measures service quality in a number of ways, as follows: RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

. External First Class Measurement System (EXFC) is an independent, third- party system that measures First-Class Mail performance from the time mail enters the mailstream until the time it is delivered. EXFC examines service from a customer perspective for overnight, two-day, and three-day service areas. . Express Mail Reporting System (EMRS) is an internal system that measures the on-time performance of Express Mail on an individual piece basis. . Priority Mail End-to-End (PETE) is an independent, external measurement system that measures Priority Mail performance from the time mail enters the system until the time it is delivered. PETE is a customer-focused system which encompasses about 70% of the nation’s destinating, identified Priority Mail volume. . Customer Satisfaction Measurement (CSM) is an independent, third-party measurement system that provides measures of customer experience with Postal products and services. The CSM survey provides information to Postal Service management on ways to improve overall customer satisfaction. . The Accuracy of Delivery Indicator (ADI) is an independent, extemally- measured quality indicator for misdelivered and damaged mail. ADI is for internal use only and is intended to complement the customer satisfaction measures of accuracy. (-4 The Postal Sewfce believes that service has generally improved over the last five to ten years, but is concerned that this trend may not continue if capital spending is excessively limited. Capital investments typically improve sewice by responding to network growth, by increasing productive capacity, improving accessibility, increasing reliability and/or throughput of operations or otherwise directly or indirectly sewing our customers. Virtually any automation or facilities project or vehicle purchase could be used to illustrate this impact. (4 See answer to part (c), above. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCA/uSPS-TG-10. Please refer to your testimony at page 46, lines 4-13. Please define the hurdle rate used by the Postal Service in determining whether to implement a capital investment project. (4 Assuming that the hurdle rate is the internal rate of return that an investment must yield in order to qualify for implementation, please explain how the rate is computed, including examples of the measurement of benefits, measurement of costs, and derivation of a cost of capital. (W Please provide three examples of the computation of a hurdle rate, based on actual investments. (4 If the hurdle rate is not the internal rate of return that an investment must yield in order to qualify for implementation, please explain the computation of the appropriate rate, including examples of the measurement of benefits, the measurement of costs, and the derivation of a cost of capital. (d) Please provide three examples of the computation of a hurdle rate, based on actual investments.

RESPONSE:

The required economic return for capital projects is addressed in Section l-5.2 of Handbook F-66, General Investment Policies and Procedures (see Attachment I). As noted in Attachment II, Decision Analysis Report Factors/Costs of Borrowing Update, for economically justified projects, a Return on Investment (ROI) threshold or hurdle rate of 20 percent is used. (a) Please see Attachment II referenced above.

@I Attachment Ill provides the cash flow statements for three projects reflecting return on investment, calculations.

(4 Please see above response. (d) See my response to (b) above. Al-rACHMENT I OCAAJSPS-T610 (a) Introduction l-5 Investment Strategy

1-5.1Objectives The investment strategy of the Postal Service has the following objectives: To invest in buildings, equipment, and other corporate initiatives to attain maximum operating efficiency or an overall acceptable return on investment (ROI). To invest in facilities and equipment that provide desirable working condkions for Postal Service employees. To provkfe convenient access to existing and future air and surface transportation facirkiis. To control costs. To support me strategies of the Strategic Plan and the goals of the CusromerPeffect!m parformama management system. To ensure adequate security of the mail and postal assets. To improve the level of services offered and respond to customer needs. To enhance material handling, transportatff, retail, and administrative operatlcns. To invest in revenue-generating programs.

l-52 Required Economic Return The vice ptesident, Finance. Controller, periodically publishes a memo updating the required ROI for investment projects. This memo establishes the ourrant cost of capital and rtsk factors, which are used to detemtfne the dllunt rala wed in the cash flow to calcukde the net present value (NPV) ol a proposed fnvestment. The NPV detennfnes whether a pmfect meets the investment standards of the Postal Service. To be justfffed solely on economica, ;I prcjeot must meet or exceed the ROI threshold (d&count rate) for that categoty of project. This memo also pmvfdes updated DAR factors for wcefelll c4 baseline costs, servicewide c&e. and productive work-years (aw Exhibf l-l).

1-52.1 Generathm and Sustaining Investments Dffferent discount rates apply. depending on the type of project and whether thm investment fs generatfve or sustaining: l G9nmrmtlvoinvmtmont8 are driven by economic consfderagof~. They mual not cnfy meaaurebly enhance postal operations but must demonstrate the potentiit to provide economic bsnefks (that is, an ROI that equafs or exceeds the establffed minimum ROI). . Surleining lnveetmente assure the continuation of ongoing operations (for example, by correctfng or eliminating a problem) while maintaining securky, service, and approptfate working condiiions. Economic benefits, if any, are generally secondary.

April 1999 9 AiTACHMENT II OCPJUSPS-TG-10(a) Page 1 of 2 .

August 22,200l

ALL OFFICERS AREA FINANCE MANAGERS DISTRICT MANAGERS MANAGERS, PROCESSING AND DISTRIBUTION CENTER/FACILITY MANAGERS, FACILITIES SERVICE OFFICE

SUBJECT: Decision Analysis Report Factors/Cost of Sorrowing Update

A review of the cost of borrowing to be utilized in the calculation of present values For Decision Analysis Reports has been performed. This rate has bean determined to be 5.5 percent. This reftects our current cost of debt financing and should not be confused with the cost of capital utilized in the calculation of Economic Value Added nor as the input to the Pay for Performance Program.

The escalation factors for USPS labor, non-USPS labor. energy-related cost items, and all other costs were reviewed and updated using the June 2001 Data Resource Incorporated-WEFA forecast. The factors represent a ten-year average beginning fiscal year 2000 through 2009. These factors reflect a downward trend in labor costs and upward trend in energy and other costs over the previous forecast. The servicewide and productive workyear factors have not changed, bawd on fiscal par 2W0, the latest wmplete fiscal year. All of the factors will be reviewed and updated, as necessary.

Attached for your information is an updated matrix portraying the current rates, which will be effective on September 6.2001. All projects not in the review cycle should use these new factor-a For those projects currently being considered for final approval, please wntact Capital and Program Evaluation for guidance.

Donna M. Peak

Attachment

cc: Mr. Hartsock Mr. Sgro Mr. Tayman Ms. Weir AmACHMENT II OCAIUSPS-T610 (a) Page 2 of 2

DECISION ANALYSIS REPORT (DAR) FACTORS

A. DISCOUNT RATE/RETURN ON INVESTMENT (ROI)

sustaining generative

risk cost of discount risk cost of discount factor borrowing rate factor borrowing rate (a) W (a+W (a) (b) (a+b) Building/vehicles 1.5% 5.5% 7.0% 35% 5.5% 9.0% mechanbzition 2.5% 5.5% 6.0% 4.5% 5.5% 10.0% (automation) high tachnolcgy 5.5% 5.5% 11.0% new ventures 5.5% 5.5% 11.0%

‘reviewed semi-annually

Economically justified projects should meat or exceed a 20 percent ROI threshold. However, other issues. such as service and safety, may influence this threshold.

8. ESCALATION FACTORS USPS workhour rate* 2.9% Non-USPS labor workhour rate 3.9% Energy-related wst items 2.9% All other costs 2.0% *Composite rate, including all banelits and servicewide, to be used when specific outyear rates are unknown.

C. SERVICEWIDE FACTORS Servicewide factors are to be used in a financial analysis of wntracting out versus in- house servicas only. This factor is multiplied against labor wsts to determine personnel costs paid at the national level which are not reflected in the local labor rates (example: civil service deferred retirement liability and unemployment compensation).

bargaining supervisor 6.7% 6.6%

D. PRODUCTIVE WORKYFAR FACTORS Productive workyear factors for use in all decision analysis reports and contracting out versus in-housestiw analyses. These factors represent the number of workhours in a workyear and are used in conjunction with the local workhour rates (which include compensation and bene5ts) in order to determine the cost per workyear.

bargaining supervisor 1.763 hours 1,623 hours Effawve date: Seotember 6.200

Donna M. Peak Vice President, Finance, Controller Equipment~Project, Example #l ($000)

STE PREPARATIGN CDNTINGENCY

ENERGY COSTS f?EClJFWNG SPMlES INlTlAl. MAINT. TRAINING (DIRECT LABOR) INITIAL OPERATOR TRAlNlNG (DIRECT LABOR) RECURRING MUNTJGPERATGR TRAINING ACC,TIGNAl. SUPEl?WSlCN 6 ALLIED LABOR

- -. - . Equipment Project, Example #2 ($000) I

FISCAL YEAR 199; 1996 1% 200( -2iz 200 200 .OTAL PRWECT YEAR -7 1 ; I#OF MACHINES INSTALLED - 240 240 CAPlTAL INVESTMENT HARDWARE 3121X 466w -76mo SITE PREPARATION -153t -23o4 3840 CONTINGENCY -3121 4660 -7800 INITlAL SITE SPARES -323: 464a -8081 MAINTENANCE CONTRACT COSTS -3798 -3798 OPERATOR CONTRACTOR TRAINING -95 -95 SPEClAL TOOLING -10: -155 -259 INSTALLATION -2m 4320 -7200 TOTAL CAPlTAL INVESTMENT 1207: -67ooo 109072 - - - EXPENSE INVESTMENT DEPOTSPAREPARTS -2159 -2159 TOTAL EXPENSE INVESTMENT -2159 -2159 - - I. OPERATlNG VARlANCES RECURRING SPARES -792 -207 -212: -2171 -223 -228 -234: I -,240; ,246: -252: -258 -23995 INITIAL MAINT. (DIRECT LASOR) 4930 -4930 INITIAL OPERATOR TRAIN. (DIRECT U -3161 -3161 RECURRING OPERATOR TRAINING -124 -321 -34 -35: -36 -38 -39! i -411 -421 45! 4027 RECURRING MAINT. TRAlNlNG -699 -185: -192: -IQQ! -207 -214 -2231 I _,231( .246 -2501 -22723 POSTAL MAlNTENANCE -1964 -525 -545: -566! -586 -610: 833t i - 657t 882f -708: -735 54523 ENERGY -259 86: -7M -73 -75 -78 -60i r -63 86: 89: -92: -6231 SAVINGS 12314 5416! 5672~ 5a67! 6111 6343 35a5l 16 635: ‘095( 72&l ‘644 41 661884 TOTAL OPERANNG VARlANCES 366 43971 u317! 4796( 4981’ 5173! 5373t I5 ‘581d i7Q6! 1253: 1. NET CASH FLOW -4207: -68794 43971 im 47w 4981 5173 575 I5 ?z5 i796.f i253: ‘. RETURN ON INVESTMENT c 36.72% 1. NET PRESENT VALUE @ 11.6% $157.129 Equipment Project, Example #3 ($000) - - 1 I‘ISCAL YEAR 199 7- 1998 IQQ F- ZG 2001 2cm2 200: 2m 2005 200 200 2a 7 7 PROJECT YEAR 0 1 2 4 5 t a 11 - - - - I OF MACHINES INSTALLED 240 240 - - - - CAPITAL INVESTMENT HAFXIWARE -3120 0 46aoo -7aom SITE PREPARATION -153 6 -2304 -3840 CONTINGENCY -312 0 -4880 -76Oa INlTlAL SITE SPARES -323 2 4818 -8081 MAINTENANCE CONTRACT COSTS -3798 -3798 OPERATOR CONTRACTOR TRAINING -95 -95 SPECUU TOOLING -10 3 -155 -259 INSTALLATION -266 0 -4320 -7200 TOTAL CAPlTAL INVESTMENT -4207 2 67cnQ 109072 - EXPENSEINVESTMENT DEPOTSPAREPARTS -2159 -2159 TOTAL EXPENSE INVESTMENT -2159 -2159 - - . OPERATING VARIANCES RECURRING SPARES -792 -207 1 -,212: -2176 -2236 -226t -234: -2402 -246: -252: -25l -23995 INITIAL MAINT. (DIRECT LABOR) 4930 -4930 INITIAL OPERATOR TRAIN. (DIRECT LABOR: 1 -3161 -3161 RECURRING OPERATOR TRAlNlNG -124 -321B -34’ -363 -367 -381 -39! 410 -421 44: -4: 4027 RECURRING M4lNT. TRAINING 899 -ias 2 .,192: -1995 -2071 -214s -223 -2316 -24a -249! -255 -22723 POSTAL MAINTENANCE -1964 -525 7 _,545; -5665 -5880 810: -633! 8576 -662I -706! -73: -64523 ENERGY -259 -6a 3 -7M -730 -755 -76( -8Oi 834 86: -89: -92 -6231 SAVINGS 20695 9191199 625 ml2 103706 107641 1174( II5986 12039 24W 2971 123142 TOTAL OPERATING VARIANCES 8947 6172188 ,57M I6993 92406 9594s 99621 #0344a 10741: 1153l i5aa 391552 - : NET CASH FLOW 4207 2 -60213 81721aa Giii 16983 92406 9594! 99621 IO3446 10741: KG 15 a80320 - - RETURN ON INVESTMENT 66.4% I. NET PRESENT VALUE @ 11.6% $367.676 RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCAJUSPS-16-i 1. Please refer to your testimony at page 46, lines 4-13. (4 What has been the average projected and realized internal rate of return (or the expected hurdle rate) over each of the last five years for initiated capital projects on a total basis in each of the following areas: land, buildings, vehicles, customer service equipment, postal support equipment, mechanized processing equipment, and automated processing equipment. Please provide both projected and realized rates. Please provide information on a total basis for each of the types of investment. (W How does the Postal Service determine whether a project is successful--i.e. is there internal monitoring of actual savings or, alternatively, a different type of measure? Please explain in detail. (c) Please provide the documentation that delineates the USPS standards for determining the success or failure of investment projects.

RESPONSE:

(4 Attached is the requested information for projected rates of return that is available by investment category for FYs 1998 through 2002. The actual realized rates by category are not calculated.

03 A successful project is one that meets the goals established in the projects Decision Analysis Report (DAR). For sustaining projects, the benefits could be related to such non-economic factors as service improvement, safety, infrastructure, or some other objective spelled out in the DAR. A generative project would be expected to attain the ROI projected for it in the DAR to be judged a complete success; at a minimum, however, it should meet or exceed the Postal Service’s discount rate. To ensure that cost savings from capital projects are captured, cost reductions are included in operating budgets.

1988 1999 2oa 2Qol ZOQZ

TOTAL FACILITIES CAPITAL BUC’XT 11.964 11.653 $1.443 MS2 $519

CORRESPONDING NET CASHFLOW - (SM7) ($526) ($525) ($271) -216 NW - W6281 (S3.446) 134267) (S2.958) (S2.87S) FAClLlTlES PROGRAM ROI . 3,3% 3.5% 3.4% 2.3% 2~2%

TOTAL AUTOIMECH CAPITAL BUDGET $1.733 Sl.Aa8 $1.470 $1.133

CORRESPONDlNG NET CASHFLOW = W-1 w722) WY) (S255) (SW NP” - Se.823 IS.014 365% $3.803 $5.335 AUTOIMECH PROGRAM ROI = 25.0% 31.1% 25.5% 3&Z% 29.7%

TOTAL MHICLES CAPITAL BUDGET $285 $292 $353 $54 SO4

CORRESPONDING NET CASHFLOW - ($121) (stral (11411 WJI NW- ($312) ($324) RW7) wow VEHICLES PROGRAM ROI: -3.7% 2.5% -3.2% -7.3% .2.B%

TOTAL RETAIL EGUIPMEM CAPITAL BUOGET $387 $244 $198 380

CORRESPONDING NET CASHFLOW - (Sl551 ($1241 (SlO2) wol NW - w491 lS163) ($152) lsw RETAIL EQUIPMENT PROGRAM ROI - 5.5% 0.0% 8.6% 10.2%

TOTAL POSTAL SUPPORT CAPITAL BUDGET $1.217 3641 3490 $181 $581

CORRESPONDING NET CASHFLOW - (1925) w%l (S385.1 0155) (5439) NW - (1754) (sSl5) WW (S580) (1710) POSTAL SUPPORT PROGRAM FiOI = 3.3% 4.2% 2.1% 4.sn 3.m

SUMMARY 1980 lsoo 2GQo 2001 2w2

TOTAL CYR CAPlTAl PLAN = $5.593 S4.442 Y.mo Il.601 s2.405

CORRESPONDING NET CASHFLOW = ($2.476) (S1.611) 01.713) (S5191 cs1.177l

SUM OF NET PRESENT VALUES = $943 15% Sl.10 oww 11.503

R.O.I. FOR THE MIX - 15.9% 14.9% 18.6% 14.7% 17.5% RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCANSPS-1612. Please refer to your testimony at page 46, lines 4-13. What are the projected internal rates of return over each of the next five years for the planned capital projects on an overall basis and in the following areas: land, buildings, vehicles, customer service equipment, postal support equipment, mechanized processing equipment, and automated processing equipment. (a) What is the projected dollar level of investment for each of the above cost classifications? @I How will each of these investments impact service quality and service standards?

RESPONSE:

Please see my response to O&%/USPS-TG-11(a) for the projected return on investment for FY 2002. A revised five-year Capital Investment Plan has not been developed, accordingly the requested information is not available beyond FY 2002. (a) Please see my response to OCAAJSPS-TG-7. @I Please see my response to OCAIUSPS-TG-9(a). RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCAAISPS-T6-13. Please refer to your testimony at page 11, lines 18-24. This discusses the problem of paring down further an already limited capital program. The Postal Service earlier this year made major cuts in its investment budget. (a) For each year since and including FY 1999 for which the investment budget has been cut, please explain why the planned level of investment was cut. (4 For each year since and including FY 1999 for which the investment budget has been raised, please explain why the planned level of investment was raised. (c) Please explain how these changes in the level of investment have impacted or will impact customer service, the quality of service, and service standards for the postal years 2000-2005; please provide projected information on a yearly basis. (d) Please explain how these changes in the level of investment have impacted or will impact the need for a contingency. (4 Please explain how these changes in the level of investment have impacted operating costs in the past or will impact operating costs over the next five years; please provide information on a yearly basis. (r) Please provide USPS documentation justifying the elimination and/or deferment of capital projects since and including FY 1999. (9) Please provide information on the projected internal rates of return for the investment projects terminated or delayed by the following asset classes: land, buildings, vehicles, customer service equipment, postal support equipment, mechanized processing equipment, and automated processing equipment.

RESPONSE: (a) There was no reduction in the capital investment plan for Fiscal Year 1999. Planned capital investments for Fiscal Year 2000 were reduced by $550 million as referenced in the attachment to my response to OCA/USPS-TG-4. The planned commitments for Fiscal Year 2001 were reduced by $2 billion as referenced in my testimony on page 46, lines 4-13. (b) There were no actions taken to raise investment levels in the years requested. w Although the investment level was reduced, the Postal Service focused on using available funds to invest in generative projects. The outcome for both FY 2000 and 2001 has been an improvement in the productivity rates for the organization. We do not project a degradation in service.

04 Reductions in planned for capital investments were implemented to conserve cash. The inadequate contingency recommended by the Commission in Docket NO. R2000-1 contributed to the cash shortfall. This unfortunate experience reinforces the RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

need to adopt the Postal Service’s reasonable contingency provision and demonstrates the Postal Service’s ability to absorb financial risk is extremely limited and has collateral consequences. (e) In FY 2000, capital investments were reduced by $553 million in an effort to reduce the depreciation cost. The impact was a reduction in depreciation cost of $40 million; however, at the end of the fiscal year, prior investments in the Point of Service project were capitalized, resulting in depreciation overruns. For FY 2001, the reduction of $2 billion in investments resulted in a $44 million reduction in the depreciation cost. We know that a reduction in capital expenditures now will most likely result in a negative impact on operating costs in the out years. However, it is impossible to project the effect of those reduced expenditures on a yearly basis due to the many unknowns involved and the complex nature of the business. It should be noted that the investments are not being reduced to save money; they are being curtailed as a result of our diminished ability to generate sufficient funds in the present economic environment.

(f) See the attached statement of the Chairman of the Board of Governors.

(9) All the delayed projects for FY 2001 were facility-related projects having projected rates of return of zero or less.

OCT 10, 2001

PROPERTY SERV CODENO. LIFE PCN DEscRIPT*mi

07 HAND P- TRUCK *oooLBS WmRY, 10 ACCESS COUTROL SYS BADGE REAOER 10 ACCESS CONTROL SYSTm 10 KcESS/SEcuRITY/- E*“IP?mNT 03 AcoLlsTIcAL covERs/srLwcING EQPT 05 rkmPT?.K, AOP 05 moREssING pv\cHINE 05 NIP -rNG/lrr\1NTENAN CB EQF-T 03 MP w3DIPIcATIoN COST 05 MP TESTIt+3/NU”.Z/~ITRING EQPT 10 RIR CoNmTImER 03 AIR CUNTRACCD&TA MLL SYS. rcDC.5 10 AIR CURTAIN, ENT,U"CE/E,XT DOOR 10 AIRCRAFT 07 ALERT SPRKLR/KAPISTANEOOIP (EMERY1 10 ALTERNATOR,POWER PLANT 05 MPL*PIER, ecmR/SCaJNn 10 ANALYZER. t4aKK II 10 8NALYZGR. VEHICLE WmnENANCE 07 ANaB scAm WEFSI

10 ANSWBRINWRECORDIW UNIT, lxLB sYS 05 MII-RK-RTR,SPLS/SVCS,LAN WIRE 05 AOI/USER-SER"!ZR,,,ONTOR.PRI~ 10 AKT/sTAnlARY/oEcomToK ITmS 05 AsSlxIATE OPPICE INPRAmR"crvRE IO AlmIo-vIsuu "IScBLWNEO"S EQPT ocp 10, a001 PROPERTYCODE "UMBER9 - DRSCR,FTIoH SEQ"ENCE LISTING FOR PRcamEMEm L .s"PPLY MANAG- PERSONNEL

PROPERTY COFHIll?4ENT SER” CODENO. ACCOW LIFE

8230.00 86531 10 NmIO-VISUAL SPECIAL EFFECTSEQPT 8220.00 86531 10 auD~0, PLMER/RECoRDER B010.00 06531 10 AUDKJMETER 9300.60 86231 10 *m-o P*cF.Ao~ PKocEssIuG SYS (APPSI 39BO.OE 86533 0, BADGEPUNCHBR 2080.00 06532 10 0KLER. PKPBR 9500.00 86235 10 BAK CODEREADER 8010.01 06531 10 BBD, MEDICAL UNn 2110.00 86512 10 FlmmER/mAKB, METAL 3500.01 665.31 10 BINLnnGkmCnINE 9100.00 66231 10 nMc CONTAINERLomER/uNLoADm WOO.19 86231 IO WK! INBOm-OuTBotmLl CONYMOD COST 9700.10 8623, 10 mc INBcl~-OuTnOmTon CGWEYOR 9700.20 86211 10 MC PARCELSORTIN IND"crIow UNIT 9700.29 86231 IO mlc PARCELSORTING MP.cm WOD COST 9700.22 86231 10 mc PARCELSORTIN WRC"INE 9700.39 86231 10 mc PROCESSCONTROL SW MODCOST P700.30 86231 10 Enc PROCESSCONTROL SYSTW 9700.10 86231 10 WC SACK .?unKEwTpIAcH1* 9700.50 86231 10 WC SACK SORTERAND tOlSBR 9700.60 86231 10 Btx TMNFIOR - nn%RNhL Tel csmv 9700.62 86231 10 Euc TOWVGYOK- WEARBARwR.RIcAT*R 2220.10 86532 10 BOARD, DIRECTORY, COWTROLOR llISC 6000.00 865X 10 BODY 6 FmMlz mmlxNANcE e*"IPnsNT 6090.00 86532 10 BODY. UTrLIn VEHICLE Iu1N-r SERVICE 3000.10 86531 10 Bo0KcA.s~ OCT 10. 2001 PROPERlv CODENIMBERS - DBscRIE-T*oN seduce LIs*ING FOR PRDNRBIW L SUPPLY HANMEPIENTPERSONNE‘

PROPERTY SEW CODENO. LIFE PCN DESCRIPTION

BOlO .oo 10 !acmli, AUDICMETERBXAnININO 6070.00 10 B~mI~ENAHcG !aQTJIFtaNT 4230.05 03 BTRY 0cF.w cm30 SYS Fw.L?T umERY) 2220.90 10 B"ILDINo sQurPnm, WISCELLma?o"s 9000.00 10 BULK CONVEYOR 7000.00 10 0uI.LETIN 0oARD. LOBBY 3980.12 05 0u0STER. FORMOR CARD 8110.00 10 cABINm/SPgcIAL mn?N. PIu4 PROCESS 3100.32 10 CABINET. ADP 3100.00 10 CABIIPET, PILE 3100 .OI 10 CARI"E'T.FILBcARD 3100.0s 10 CAmNET. FILE I,xm0AL 3100.12 10 CAmNm, FILE SGCURIN 3100.16 10 CAmtam, PILE/STAND "IsIeLB REcm!x 3100.10 IO CAilINET, ImORAToRY 3100.36 10 CABINET. W/PLAN 00~0.12 10 cA0INET, WEDICALUNIT 3100.16 10 CABmET, MIcROFIu4/MICROFIC 3100..0 10 cA0INm, SFOraoE 2150 .oo 10 ch0IW. MOL hND PlrRTS s000.00 P cAFEeQ.cABINFF 8000.02 10 CAFE !a. CAKT 8000.01 10 cm0 w, CASH REGISTER 8000.06 10 CAFS EO, COFFEE"RN eooo.os 10 CAFS 00. cMyDIl4ENT STAND 8000.10 10 CIFS !+a, cooNTs0L*NE

-. -. -~_-- -. ATTACHMENT OCAIUSPS-T6-16 Page 4 of 35 cm 10. 2001 PROPERTYCODE NIMBERS - DRSCRIPTIONSEQ"m,CR PAGE 5 LlSTING FOR PRoclJRrnEN? L SUPPLYmAtwdu.lm PERS-‘

PROPERTY SER” CODE No. LIFE PCN DSSCRIPTION

8000.66 10 CAFE EO, STEAMTA0LE 8000.60 10 CAFE EO. TRAY WNDLING EQ"IpI(~ 8000.70 10 CAF0 EP, WAEnINGCABINET 3200.00 05 czsLanAm0

3200.~0 OS cALcuLATO0. PROGRWRBLE

0100.00 10 CAMERA 8100.60 10 CAnERA*cc0sSO0IES 9100.20 10 CAnERA, DocmmNT s0.0.00 10 CAWRI, ID *100.30 IO CAMmA, MIcRoFIlA 0100.40 10 cNo3sA. mlvm

8100.50 10 lzA!umA, VIDEO

,010 ..O 10 cmLLER FLAT

40~0.30 10 CANCELLING w.cliIrn 1010.00 10 CANCELLING MACHINE, "-,6 4010.10 10 CANCELLINGktru3iINE. MARKII 1010.20 IO cANCELLING/FACINGIVICHINE 3905.00 05 CARDPUNCH 3905.01 05 CAUDRENIER 3905.08 05 CARDSORTFLR 0600.00 10 cARDBOARDcAsE MaKIND l4AclfINE

2040.00 IO CARPET cwN1womcn1NE 4100.00 10 caRP.IER. cm Ll4xm.RI~S 4600.10 10 CaRRIER. PERSONNEL *oso.10 10 CART/TRUCK, CUSMDIAL 8010.16 10 CAKT. MEDICAL UNIT

_--_e -- . ^ _ - . _. ~. ARACHMENT OCAJJSPS-T&16 Page 6 of 35 AlTACHMENT OCNUSPS-T6.16 Page 7 of 35 PROPERTY BIG COD!?. No. PCN DESCRIFTION

1Ks oesr/NoaKsTATroN

1Ns DICrATINWTRANSCRISINo SQ”IPMFx$I

3TA DISK PACK

3TA DISK STORIGE ORI”!

3Fr DISPENSER. lA!aEL

3m DISPRNSRR. TW6

1Er DISPSNSER, TICKRT NACNINS

2Dc DlvERTSR CNwm MARK *I

2D” DIVNRTER ErsSR WGDER Nl-maMsNr

em* DOCK PWTR PoRTARIsE hW%W

3DP DOCKSOARD/~I[RAIIP, PORTABLE

2PD DOLLY, VRHICLR TONING

1m DRAFCING EQorPNEwT

lrn DRAFTING TABLE 2‘B DRILL

2La DRILL PRESS

llpl DRILL/PoNM, PAPER

2JC DRxv!zE-TNRU/WILK-UP WINDON ASSEMBLY

lhm DRYER. Plul PROCESSING

2DE DUAL PASS ROUOH CULL SYSTSN (DPRCS)

308 DImPER. NANPBR

1°F WPLlcATmG SWT, OPFSRT

1°F WPLICATING &XT, PLATS “MER UNIT

IHP DUPLICATING EPPT, STENCZL ONIT

1°F WPLICATIW SOPT, TRANSPARENCY UNIT 1°F WPLJCITING MPT, “AKTTYPER ocr 10. 200, PROPNRTYCGDF, lwmxls - DSSCRIFTmN SEQUENCE PAGE 9 LISTING FOR PROCURMSNTL SDPPLYPUNAGEMENT PSRSONNSL

PROPERTY BIG CODENo.

lrn D”FLI‘!hTING/PRINTING, HlSC EQFT 1°F D”*LIcA*cm, WDIO 1NN D”PLIcA?oR, NIcROFIu4/NICROPIcNE 2FY DYNANCUETBR,vENlcLE 20” WGKR e!%wKa 2DN EDGERSThCWR 3D.l SLSCTRIC PORKLIFr IMERYJ 1Rs S~m-IoGwH 1Hy mFJoS8u4GblP.cNINE 2PC ENGms NaI- CR EPOIPNWT llm -GKR, Plul PWCSSSING 3FY SN”EtOPE STDFFBR/ SEALERSYSTM 32-Y BPI(OI( PSGGRUMERDWICE 1°F FEEDER, ADDRESSINOEQDIFlmm 1°F FEEDER, ca.LmoR EQDIPNENT ,FY FSEDRR. LASEL PRINTRR 1* FSEDER. P”oToc0PY EQ”m4KNT ll4.3 FILR, MTCMhTSD SYSTEMUNIT 1NG FILE. rlGTAR* 1”G FILE, SHBLVlNG MD FILN PRocsssING. “wzELLmEo”s EQPT 2* PlNlSHmG F@r-. N!mAL 1RY FIRE, s- ‘ RESCUEE*“IFMmT 1DF FIXED MECSMSMXW CONTSYS 2DK FlAT SORTERSIN UNIT ZDK FLAT SORTER‘2”l.L “NIT DCT 10. 2001 PAGE 10

PROPERTY cOmITl?4EN? SEW BIG CODENO. I)ccMMp LIFE

2DK 9200~.30 06235 10 2DK 9200.40 86235 10 2DF. P200.00 86235 10 2DK P200.50 86232 10 2DK P210.10 86232 06 1W 3500.3* 86531 10 1RY 8600.10 86531 10 2LS 2110.10 SC532 10 7wc 2210.10 86532 10 2lA 2100.00 86532 10 3T1 3970.00 86533 03 ITA 3970.10 86533 03 3TI 3970.20 86533 03 3Tlr 3970.30 86533 03 2l.s 2l10.12 86532 10 2PC 6010.20 86532 10 1QA 8500.00 86531 10 2L.S 2110.14 86532 10 3DJ 1230.55 06233 07 2L.n 2110.16 86532 10 2MY 2220.10 86532 10 2LY 2140.10 86532 10 2w 2200.20 86532 10 3n 3990.20 86533 OS IRE 8010.28 86531 10 lrn 3250.00 86531 10

.“._.. I. ._ - __ “I _. -. - ^ - , CT 10, 2001 PROPERTYCGDE NVnSERS - DBSCRIPTION SEQGESCE PAGE 11 LISTING FOR PROCVREMM 6 SVPPLYW&GMW PERSONNEL

PROPERTY CoIMITTnrn SEW SIC CODE"G. *ccoD?rc LIFE

2D" 1020.30 86232 05 2LA 21llo.02 86532 10 1* 3500.36 06531 10 1NY 3700.12 86531 10 200 9999.9s 86232 10 1DF 9999.99 86231 10 1SB 3610.99 86531 06 1IM 8300.10 S6531 10 2DC .010.93 (16232 10 2JG 7120.20 86432 07 2PD 6020.10 86532 10 1m 3500.3s 06931 10 2LS 2110.18 86532 10 2LY 2120.20 86532 10 1gA 8900.10 86531 10 2FD .410.00 86232 10 ZLY 2120.30 86532 10 2LY 21.0.20 86532 10 1m 8010.20 86531 10 *LB 2110.20 86532 10 2Fx 2050.90 86532 05 IN2 8210.10 8663, 10 1HB 8100.70 86531 10 2DD 9100.00 86232 10 2w 9100.10 86232 10 lxy 3.00.00 065.31 *Cl CJcr 10. 2001 PRGPERTT CODE WMBERS - DESCRlPTIM SEQDZNCB PAGE 12 LISTING FOR PROCUREI(~ L SUPPLYEuNMi- PERSONNEL

PROPERTY ccun*TlnEm SEW RIG CODENO. ACCODNT LIFE Pm4 DsScRIPTIGN

2r.Y 2110.10 86932 10 LIFT PWLTRXW, CLWING/,4iXINTENANCE 2LY 2140.25 86532 10 LIf-r, BATTERY 2LY 2110.30 86532 10 LIFT, TABLE 2PD 6020.30 86932 10 LIFT, VEHICLE 1RR 8010.32 86531 10 LIGHT. MSDICAL CDlIT *m 8230.20 86531 10 LIGWTS 6 LIGHTING, SPECIALIZED IDS 9700.09 86231 10 U)ADER/DNLoADER "ODIlTATIoN 1DF 9000.20 SC231 10 LOOSEn&IL CCNVGYORSYSTD! 2DD 9100.34 86232 10 LSU - ELECTRONICSORT PROCESSOR 2DD 9100.91 86232 10 LSM - RXPANDRDZIP RBTWPIT 2DD 9100.92 86232 01 Lsw - SZR llAmTRNANcE TERIIINAL 2DD 9100.94 86232 10 It.?4 - "Acoul SYSTM 2DD 9100.30 86232 10 LSW - ZIP MAIL TRANSLATOR 2DD 9100.93 86232 10 LSM MISC PIGDIFICATIGN COST 2DD 9100.20 86232 10 Lsn TRAY coNvEYOR SYSTEn 2DD 9110.00 86232 05 LSMMFCS-DBCSDIRECT CDNNECTSYS) 3TA 3900.30 06533 05 bWG"ETIC TlrFh UNlT 3TA 3900.3. 86533 05 NGNKTIC TAPE "NIT. M,XW.,,TW loA 8500.90 06531 10 MAIL aam SHOP"*sCE-"s EQPT IDF 9000.30 86231 10 MAIL PREPARATIONSYSTEM 1cln s51cl.90 86931 10 MkILmG FAcILITY WISCELLANRG"SEQPT 2LY 2120.90 86532 10 UAI-co. MISC MOLS &ND IQpT 1RB 8010.36 86531 10 MEDICAL INSTRUIWT/DIAGWXTIC SQPT ml3 8010.10 86531 10 I(EDICU. TRKXIMWT EQPT 6 DS"ICES 3TA 3900.10 86533 OS MEWORYSTORAGE "NIT 3TI 3900.41 86533 05 llmoRY STORAGR,CONTSGLLSR

;,, ,, ,,, ,,,. ., ;,, ,,, ,., ,, ,, ,,,, ,, ,",,., .,, ,, ,, PROPERTYCODE NWBERS - DESCRIPTION S*DENcE PAGE 13 LISTING FOR PRocuRp1SNI' 6 SUPPLYPIANAoEnSW PERSGNNSL

PROPERTY SEW mm No. LIFE

.090 .oo 10 3700.16 10 3920.10 03

3950.00 03 3950.10 03 3950.20 03 3950.30 03 3990.1cl 03

3990.50 03 ,950. PO 03

3950.82 03

3950.60 03

,950.70 03 3950.90 03 3995.10 10 8210.20 10 3700.20 10 2110.22 10 3940.10 09 3940.00 09 3940.20 09 2120.*0 10 2100.00 10 3910.00 01 3600.99 10 .010.94 OS

- ocr 10, a001 PROPERTYCODE NUHSERS - DESCRIPTIONSSQDE"CS PAGE 14 LISTING FOR PROCORMWT6 SUPPLY"ANAGPI~ PSRSOMJEL

PROPERTY csmrnuE?rc SEW SIC CODENO. kc- LIFE PQI DESCRIPTION

1MH 8300.20 06531 10 9lmwlwR. TV 1DP 9000.39 116231 10 myTORAIL MODlFICATION COST 1DI 9000.35 86231 10 MONORIIL SORTI"G SYSTW *KY 2090.00 86532 09 MmlER. LAWN 3K.l 7210.10 06433 10 MDLTI-ComODITy "ENDI"G~M",ING 1DF 9000.50 86231 10 MGLTI-SLIDE 1DP 9000.10 06231 10 WLTISELT SORTINGSYSTM 3TB 3910.10 *CT33 04 "DLTIPLSXOR 2LS 2110.26 86532 10 NurcHER IF3 3000.15 86931 07 OPPICB EUNITDRScuwww BwmY~ 1w 3000.59 86531 0, OWICE FGF3IT"P.E DRSI (EHERYI 1KY 3000.90 86531 10 OFFICE l%mNITuilE. MISCEL-cluS 1HY 3250.90 86531 10 OFPlCE nwzHIwes L E0"IPMwT. "ISC UN 3250.04 06531 10 OPFMR, eNvELoPE 1sc 3620.00 86931 10 P/A - INI'ERrn - MVSIC - SYSTEM 29.9 2000.30 86932 10 PACI(ER/CCMPACTER,TRASR. DISPOSAL 2l.Y 2160.00 86932 10 PAINT SHOPE*"IPmNT. HISCSLLANEO"S 1DP 9OOcl.60 86231 10 F- IJtImmBR 1DF 9300.00 86231 10 PARCELSORTING MACHINE 1lN 3500.40 86931 10 PERFQRITOII 1SA 3600.20 86531 07 PHGNSSYSTERH L L&N ,E"SRY, 1Nr 3700.21 86531 10 PHOTOIMAGE ID KIT 1HF 3500.62 86931 05 PHOTOTYPEcollWSINo MI\C"INE 2LS 2110.28 86532 10 PIPE SNDIW/CWTING/T"READING BQPT 2l.B 2110.30 86532 10 P-R 3DF 2300.10 96233 IO P‘ATFORII ELeVATOR,LIFT. PORTABLE DCT 10, 2001 PROPERTYCODS NfMSERS - DESCRIPTION SEQUENCE PAGE 15 LISTING FOR PRDNRMSNT L SUPPLYPuNuiEMSNT PERSONNEL

PROPERTY CCWlITB(ENT SEW BIG CODENO. *C- LIPS PM DESCRIPTIM

2JG 7120.30 86.32 05 POIM OF SERVICE IPOS) *Ku 2010.00 86932 10 WLISHER/SCRDSBER,FmOR 293 2010.10 06532 10 PDLISHER, PLOOR 1NY 3700.28 06531 10 POLYGRAPH 2JE 1110.00 86.32 10 WSTlroK llepeW 2DD 9680.00 06230 10 POSTALNT0 SEDIRSCT SYS (PARS) 3TX 3909.12 06533 07 POIIERcctm***ONE* 3TY 3905.1, 06533 05 pQlE* colN!3RTKR 3TY 3909.18 86533 07 POWERPROTBCTION/- WIT 2nc 2210.20 06532 10 Fowl%! SDPPLY 3TY 3905.16 06533 09 Pcmm DnlT 2DF 9000.70 86232 10 PP DW,XISDTIW RING 2I.n 2110.32 86532 10 PP.!zSS.?iRnORlPOWR 3TA 2900.90 86933 05 PRINTER 3PY 1410.10 86233 10 PRINTER, ADDRESSLASEL 10 8110.30 06531 10 PRmTF.R. PILn PROCESSING

1llY 3100.10 06531 10 PRINTER, SIGN AND SHOWCARD 3TA 3900.54 86633 05 PRIkTING SYSTW

1MD 8110.40 SE.31 10 PRocEssoR, PIW 3** 3900.60 86033 05 PwcsssoR, IUINPRAME 3** 3900.61 86533 05 PROcESsoR, MhwF!4nMF.mROLL5R 3TA 3900.69 86533 09 PROCESSOR.OPFJUTOR CONSOLE/STATION

1ME 8200.90 86531 10 PRoJEcToll AccESSORIeS L n*sc QPT ltU3 8200.00 06931 10 PwJEcToIl, CCUPDTERImGfi 1m 8200.10 86531 10 PR*cmR, EK)WE 1ns 0200.20 86931 10 PRckJEcrOII. OPAGUE m 10, 2001 PROPERTYCODS NUnSERS - DSSCRIPTIOH SEQOENCB PAGE 16 LISTING FOR PROCURMWT L SUPPLYMAGMSWT PERSONNEL

PROPERTY ComITlnwT SEW BIG CODE NO. ACcolsNT LIFS PCNDESCRIPTIoN

1ME 86531 10 PROJEmoR, OVERHEW

Its2 86531 10 PRo.I!s~OR, SLlDK

1ME 06531 10 PROJECTOR,STRIP FIU,

1"E 86531 10 PROJWXOR,TELWISION

2PY 86532 10 PULLER EouIPmNT

2m 86537 10 PUIP, "ISCEL-US PORTABLE 2PS 86532 10 PIMP, SERVICING/DISPE"SING 2LY 86532 10 RACIL wI*m 192 86931 10 Fmx, OPPICS "IsCKLLMEo"s 2FT 86232 10 RMX, TRAY STORAGE lS!a 06531 10 IUDIO, BASE STATIMI 1SB 86531 10 RADJO. DUPLSXOR 1SB 06531 10 RADIO. FSCODER 1SB 06531 10 RADIO. FRSQDENCYFILTER 1SS 06531 05 W@IO. INSERTER 1SB 06531 05 RADIO. "OWLS TELEPHONE““ITS 1SB 06531 05 RADIO. OTHERMISCSLLANSO"S TYPE.9 1SB Sh531 05 RmIO, PAGER 1SB 86531 10 RIDIO. REMOTECONTROL UNIT OR SASS

1SB 06531 10 RADIO. R!3Pl3mER 1SS 86531 10 MDIO, SIG"& BOOSTER 1SB 86531 10 RADIO, STSTM CONTROLCOHSOLS 1SB 86531 10 RIDIO. TOWER 1SB 85531 05 WIO, TWO-W&Yk%RTABLs 1SS 06531 OS P.AD**, T!do-WAYVESICLE 1SS 06531 09 RADIO. "0TI"G SYSTEM

,,, ,,,, ,,,, ,, ,,,, ,,, ,,, ,,,, ,,,, ,’ WT 10, 2001 PROPERTY CODE NIMBERS - DESCRWTION SRQGENCE PAGE 17 LISTING POR PR- c SUPPLY mw.GMENT PGRSONUEL

PROPERTY COt44IlTUENT SEW BIG CODE “0. ACCOUNT LIFS PCN DESCRIPTION

1lBl 399s.>o 86531 10 RWDERlPRImER, "ICROFICSS

llm 3995.50 86531 10 READER/PRI"TER. MICROFIIW 3TY 3980.28 05533 01 READ!SR/puWcHER.PAPER TAPE 1HM 3995.20 86531 10 R6ADER. nICROFIcHE

llac 3995.40 86531 10 WADER. w*cFl*F*~

2DD 9600.00 86235 10 FlEwEll, OPTICALcimRAerBR 2DD 9600.10 86239 10 READER,OPTICAL Cna9AcTER cocR,cs, 3FY 1000.20 9‘733 01 IDxxa.9SIPIED EXPSNSE 3KY 1000.40 86433 01 SmxASsIPISD EXPENSS lrn 1000.50 86531 01 *GcLAssIFISD EXPESSE 2DD 9650.00 86235 05 RScoQI***m TSCSNOLCGT 3TY 3980.32 86533 03 RECOWSR, CWPDTER *M&m3 2l.h 2100.01 86532 10 REOORDER, PIXYITING ITY 3990.30 86533 05 REGISTERDISPATCH SYS, ADSRn 1DF 9000.90 86731 05 WnAnvPAcTvRED MISC M&IL PROC EQPUT 2DD 9600.20 86235 10 lIEMOTEBAE CODING I"AGE PROCESSSYS 1Rs OOlO... 86531 10 RESUSCITATORwANlF.IW

2.x 7120.10 86.32 05 RETAIL DATFi MART (Roll,

3Fs 1420.10 86233 10 REWRAP OR PATCH-UP BQ”IP”RNT *LB 2110.36 86532 10 *PJET*NG RQUIPMRNT 1DF 9400.99 85231 10 SACI[ SORT “AC” MODIPIcATION IDP 9100.00 86231 10 SIICK SORlmaG MAcnINs

1ND 7310.00 86531 10 SAPS

1ND 7310.10 06531 10 SrSe. “WLT SWELL

1DF 9800.30 86231 03 SA- IWPRO”WWT SYS. P&D CTR

IDP 9800.*0 86231 03 SAPSTY I*PROvEmNT SYS,I\IR M&IL cm

,,, ,,, ,.,, ,,,, ,,,,, ,,,, ,,,, ,,, ,,, GCY IO. 2001 PROPERTY CODE NWSERS - DESCRIPTION SEQ”SWE LIST**G FOR PROCGRMSNT L SUPPLY MANAGMENT PERSONNEL

PROPERTY SER” BIG CODE NO. LIPS PCN DBSCRIPTIW

1DP 03 sm IwPRovEnQn SYR..BuLK ItAm CY

IDF 03 SAFSTY I”PRQm SYSTW

2LB 10 SANDER

2Ln 10 SAW AND SAW !3Q”IPnENT

3M 10 SCALE, PuxlR OR PLATFORM

2JP 10 SCALE, IIISCE-ous

2JF 05 scm3, PR~~~RA~uM~S/SL~~TRIXIC

3FY IO SCALE. RSMGTS CWSO,.S/INDIC&T,,R

3Tc OS SCANNSR, cHARGrNG/~IcATIe

3M 03 SCANNSR, CONTRGLLBR

3TC 03 S-R. FIXED UNIT

3Tc OS SCANNER, IiAtmKEw DATA TERWINAL

3lT 03 S-R. PORTABLE QNIT

300 OS S-R

MY 10 SCOPS, COVERT VEHICVUR

1RC IO SCORING, TEST, Iv\cnINE

IMS 10 scRsE?J, PROJECTION

WA 10 SCREW luicnINE

2KC IO SCRUBSING MAcliINs

NY 10 SEILGR, SWSMPE

1QB 10 SSALER, “S&T TTPS

1tm 10 SECURITY CONTAIRRR WITS CABIm

3m. 03 SER”SR~“ORKSTATIW (SMSRY,

2PE 10 SSRVICINOfDISPENSING !sQ”IWm

2KY 10 SBYER WUW- SQ”IPnk?t,‘r

108 10 SSHINO MACHINE

- - ,,,,,,,,,,,,,,, ,,,, ,,,,,,,, XT IO, 1001 PROPERTY CODE RWBSRS - DESCRIPTION SEQQENCS PAGE 19 IISTmG FQR PRocoRsn KNT L SUPPLY IuNAG~Io?r PERSMMEL

PROPERTY SER” BIG CODE NO. IJFE

101 8500.30 10 sklAPrNG/mwrNG *CHINE 2LR 2110.42 10 SHEAR. METAL

2MY 2400.20 10 SHED, STORAGE

2uY 2400.30 10 SHELTER, DOCK OR YARD TYPS

2w 2100.40 10 SHELVR, SEcuRlTY GVARD

1w 3700.36 10 SmoTING PANGa sQ”IpMENT

1sY 7000.30 10 SHOWCASB/DISPL&Y CASS

IRE BO10.4B IO snQnER/yAsH, MRDICAL OR SAFErY

NY 3250.16 10 SHREDDER

UfY 3250.20 IO SHRSDDBR AND mLPSR UlY 3250.24 IO SHREDDEB SOUND RNCWSORE

UN 3100.20 10 SIGN SHOP, “ISCRL,ANEO”S EQ”IlWRNT

2* 2220.60 10 SIGN, INDoGR/ouroooK

NY 3700.02 01 SENALI”G SYWDDCK DOORS (MERY)

lnr 3250.28 10 SIGNER. CHECK OR OTHER

IMD 8110.50 10 SINK. PIIn PRocRssIwG

2DD 9500.10 10 SMALL BAR CODE SORTER wlcs,

2DL 9300..0 10 SMALL PARCELlBuHoLB SORTSR SYSTEM

1DP 9300.50 10 SMALL PARCRL/ROLL SORTER SYSTEll am 2060.00 05 s*cm BLOWER

2m 2060.90 10 sNon/IcE RE?wvAL/coNTRoL “WC EQPT

2LY 2120.50 10 SOLDSRINWDSSOLDERIM SQUIPMEW

2Dr. 9210.60 07 SORTATION WJGlf’ RAPISTAN (6ne.R~)

3KA 7300.20 10 SORTER/CIUWGBR, COIN

3KA 7300.30 10 sMiTER/cwNTER, COIN 3KA 7300.10 10 SORTER. COIN om 10, 2001 PROPSRTY CODE NVnSSRS - DESCRIPTION SBQUENCS PAGE 20 LlSTING FOR PRocuRmm L SUPPLY blaNAGME?ic PERSONNEL

PROPERTY SER" BIG CUDSNO. LIPE PCN DESCRIPTION

MC 10 SP-R SYSTSM

2‘1 30 SPWiYER. PAINT

2Ko IO SPREUlSR. ICS L SW,” CONTROL ,TA 03 SRVR LAN “IRG L FSR OPTICS (S”SRY, 3KR 30 SSPC, msTAI,*TIGN COST ,Ka 10 SSPC. SBLP SERVICE POST&LCSNTSR

2DS 10 s*AcKE* DNIT

3P.J 10 ETAUP VEWDIW MKHINR

2PD 10 STAND, VRHICLB MImENANcE

UN 10 STAPLER

2PY 10 STARTRR. VEHICLE

1Rs 10 STBRILlSBR

Irn 10 STITCSING EUCHINE. SlmK

2PP 07 STRAPPINGIUCHINE mERY,

a** 10 STRAPPING klwlmm. NO*-“S-rALLIC

2LY 10 STRAPPING MACHIRS, STEEL 2PF 10 STRAPPING SYSTM 2LY 05 STRIPE ***NmNG *~IFnSwr INY IO s~“EII&hIWE, "ISCE-0"s RQPT MY 10 SDR“RYIN0 SQ"DMENT

2K.s 10 S”SSPER ACCSSSORY/A~,,~ 2KS 10 SRSEPER, LAWN 2luz 10 SWEEPER, luNuAL

2KE 10 SWEEPER, PawmID 3m 05 SYITcHING DNIT *KG 10 TABLB

,,, ,,,, ,,,, .,, ,,’ ,,, ,, ,,i ,, om 10, 200, PROPERTYCODS N""SERS - DESCRIPTION SEQQEXCE PAGE 21 t*s**NG FOR PI(oNRMSt?r L SUPPLYMANAGmm PERSONNEL,

PROPERTY SER" SIC CODE NO. LIFE PCS DSSCRIPTION

1RE 10 TABLXICOUCH. "EDICAL SKA"/TR!dWMENT

2PE IO TANX, GAS

2KC 10 TANK, nOPPItJG

2PB 30 *mix, OIL 328 04 TSI.BCOIPIVNICA*IONSUNIT ISA 10 T!3I.EP"om SYSTW 1S1. 10 TBLEPHONSSYSTSM, HISC EQUIPbENT mm 05 TSLSv*s*ow IS* 10 TELEv1sIa? SmTION SQUIPIIENT 3TB 03 TERMNAL,SmQ*RSADS* 3TB 03 TERMINU. CRT/"DT 3Ts 03 TERnINAL, POINT OPSALE 3TB 03 TERnINAL, SCALE INPUT 3TB 03 TERMINAL, TELSCOPIER 3TB 03 *EPnINAL, TEmTYPE 328 03 *ERWINAL. TRmSIcTION 2PC 10 TEST EQ. vEK*cLx PLEcrRIcAL SYSTMS 2PC 10 T6ST !a. VBHICLS xxrn"sT 2Pc 10 TEST EQ, "S"IcLE TQNS-"PlDIMZNOSIS 2LI 10 TEST/M-GRING SQ"IP TELS'JISION STA 2La 10 TESTING/~ ING 69, OSCI‘LOSCOPE 2r.h 10 TSSTING/MSkS"RINc BP. STNDARD SETS 2I.A 10 TESTING/YEASDRING KQPT, &IR 2I.a 10 TESTING/"RASURINGSQPT. CHEMICAL 2La 10 TSST*ffi/~SAS"RINO SQPT. DISTANCE 2x.A 10 *E~T*~~G~Msss*I~~G SQPT, a.-*CM.

,,,, ,,,,, ,, ,,,, ,,, “’ ,., ,,,,, ,,, ,, ,,,, ocr 10. 2001 PROPERTYCODE WUMSSRS- DESCUIPTIONSSQGSNCP P&GE 22 LISTING FOR PRQcGuMrn ‘ SUPPLYMANAGSnSNT PERSONNSI,

PROPERTY SERV BIG CODEm. LIPE PCS QF.SCRIPTION

aIA 2100.14 86532 10 TESTINGlMeAsuRIN0 EQPT, PGXL 2I.a 2100.16 86532 10 TESTINGlHSASGRING&OPT, LABORATORY 2IA 2100.18 86532 10 TSSTING/MSAS"RINGSQPT, LIGST 2LA 2100.20 86532 IO TESTIffilMeAsDUXNG SQPT, OPTICAL 2LA 2100.21 86532 IO TESTING/MSASGRINGEQPT, PSYSICAL 2I.A 2100.26 86532 10 TESTINO/MGIISORINOBQPT, SOUND ZJA 2100.28 86532 10 TEsTING/MEISGRING SQPT, SPESD 2rA 2100.30 86532 10 TSSTING/MSASMING SQPT, TgnPSRATGRS 2La 2100.36 86532 10 NTINWWEA9OUNG EQ. WATER/MOISTQRE 1wY 3250.32 86531 IO TICK-R 3TA 3951.00 86533 03 TIM8 6 ATTEWDAN'33 SYSCTACS) 2PG 6010.00 86532 10 TIRE MAINTE"ANCBEQ"XPMEWT 2MY 2.00.50 86532 10 TQILUT, WRTASLE 1QA 8500.10 06531 10 TOOIJNG MWXINE, ELECTRIC DISCSMGE 2KY 2050.11 86532 05 TPA‘TOR 6 MGWERACCBSSORIES 3D.l 1230.00 86233 05 TRACTOR,ATTAC""EWTS ‘ WCESSOUIES 3IN 6230.10 8623, 10 TRACTOR. 1"D"STUIAL 6 PA,?,, TYPE 2K.l 2050.10 86532 05 TRACTOR, IAWW‘ YkRD TYPE 3UI 1230.20 86233 05 TRACTOR,TGw/TGQ/wAuEn0us0 3D.I .230.30 86233 10 TUXTOR. W/NIT0 GGIDANCBSYSTEw 2MY 2100.10 86532 10 TRAILSR, GTILITY/STORAGE BUILDING 1RC 8030.02 86531 10 TRAINER, BASIC BLSCTRICITY IRC 8030.0, 86531 10 TRAINSR, BASIC "YDRAGIJC/PNEUW\TICS

IUC 8030.08 86531 10 TRAINER. CCMPVPER ELECTRONICS mc 8030.12 86531 10 TRAINER, DRIVER TRAINING SYSTM IRC 8030.16 S6531 10 TRAIWER, ELECTRICALSYSTMS

-- ._“?..--.~ ~.~“--.I-----. BJC lRC lilt!

1RC

1KC

1RC

1NY

1DP

303

2PD

3D.J

3DJ

3l-Y

1EY

2PP

1°K

ZKC

2KP

1NE ccr 10. 2001 PAGE 24

PROPERTY con4ITlnENT SERV SIC CODE NO. *CCOUNT LIFE Pa4 DEscRIPTIcm

3w 86.33 10 VENDING CDNSOLE

ZDH 86132 05 "ISSATDR HOPPER ASSEHBLY

IMH 86511 10 VIDEO SPECIAL EPFBCP.5 EO"IPUSNT

IMF 86511 10 VIDEO, PLAYER/RECORDER

1”E 86531 10 "IE!dER. SLIDE/STRIP/WOVIE

1LY 06532 10 VISE

1aE 86521 10 "ISIot4 TESTING/WmmING DEVICB

MY 86531 10 VISUAL PRESLHTATION mJ"IPMmT

ZPY 86532 10 VW l4AIKwuN CE EQ, "IscELLmEo"s

ZDK 86135 07 "OICS NETl4m/RAPIsTAN F.Q"IPmlERY,

ZKC 86532 05 WAs"ER. CI#rltES

2PH 86532 10 NASHER. VEWICLE

2KC 86532 10 msH1NG/CLEAN1NG l4KHINE

2KB 86512 10 WAKER, El.mR

2L1 86532 10 WELDING EQUIP-

3DP 86233 10 WHEEL RAISER

2PJ 86532 10 mEL/SUSPENsION MMNTENANCE E*PT

2DK 86235 07 WOOD FLR SW ruPISl%N E*"IP,EMsRYI

3Tw 86533 03 WDRD PROCESSING SYSTEM

3lw 86533 03 WORD PRocESSING. CDNSOLE

3Tm 86513 03 WORD PROCESSING, COWTROLLER

3M 86533 03 WORD PRocESSI"G. IwmER

3lw 86533 03 WORD PRDcESSI"G, KEYSDAm

3Tw 86533 03 wx3D PROCGSSING, HSMOW UNIT

3m 86533 03 n0P.D PRccsssING. PRINTER

3w 86522 03 worn PRocsSSING, TERnINAL ATTACHMENT MM-VEH OCAlUSPS-T616 Page25 of 35

,SERVlCE :SALVAGE MAKE MODEL :LlFE (YRS) / VALUE I I r W-TON 01-10 i 1/4T AMG 75-76 LH 6 1 5% 01-20 j 114TAMG 75-76 RH 6 / 5% 01-30 1ll4T AMG 79 RH 1 5% 01-40 : 1l4T AMG 77 RD ; : / 5% I 01-51 ;FORD PINTO 3DR 60 CA 6 15% 01-57 ;FORD PINTO 3DR 80 ; 6 15% ; 114TAMG 76 RH CA ~ 6 5% 0161 ~~ ~-~~-~~L,sM16, E01-70 iCHRYSLER ARIES/REI 6 20% 01-71 CHRYSLER ARIES/REL.ww^..*^1^. ~IGA j LI / ‘“70 01-60 ! l/AT AMG- 82_- RH ’ 6 ! 20% 01-61 j 1141- AMG 62 RH CA 1 s j 20% 01-90 ill4TAN IG 63 RH 6 ) 20% 01-92 ;1/4TAMG64RH I 6 20% 02-10 ~1/4T AMG 70-71 L H 6 5% 11147 AMG 70-71 RH ! 6 5% i 114TAMG 73-74 LH I 6 5% i ll4T AMG 73-74 RH ~ 6 5% I I / l/2-TOI N I I I I lo-01 /~/~TFORDAERWSIAKAWLJY.---.- _‘.- 77 6 5” / lo-02 / 1/2T FORD WINDSTAR FWD 9iE E lo-03 ll/2T FORDlUTlL FF”“” =’ =Y= mu 1O-04 I1/2T FORDIUTIL_._ -..-.. FFV 01_--.. FLEXF RH~~~~ 24 5% I 1 O-05 I 1/2T I-VIW.II‘--*‘UTIL FFV 01 4x4 RH 24 I 5% lo-10 il/2T ‘CHEROKEE 4’A’D 93 RH I 6 I 5% FORD 70 RH 6 5% jli2TAMG 71 RH ! 6 I 5% I4 12T AMG 73-74 RH 6 ! 5% AMG 4x4 63 RH s ~ 15% -mT AMG 63 RH 6 ~ 15% AMG 63 RH CA 6 ! 15% UAN LLV 87 RH : 12 / 20% MAN..--. LLV ii8__.... RH 12 20% iii ,N LLV 89 RH ii ; 20% .- __-. ~~ZNIIVWRH. . . . -- . - - . 1z 20%-_ ._ I MAN LLV 91 RH 1; 20% WANLLV 92 RH 12 20% WANLLV 93 RH 12 20% MAN LLV 94 RH 12 20% 1, ,“% I 12 20% 1

Page 1 ATTACHMENT MM-VEH OCA/USPS-TG-~~ Page 26 of 35

I 10-60 1/2T GRUMMAN LLV 69 LPG RH 12 j 20% “‘‘-‘JLPGRH 12 ~ 20% IAN LLV 91 LPG RH 12 1 20% AAN LLV ,92 LPG RH 12 / 20% LLV 93 LPG RH 12 1 20% 6 I ELECT RH 8 I 1% LLVOl ELECTRH 1 8 5% : 1/2T GRUMMAN LLV 87 YV~~L-“*’ -L’nc~lyu RH 12 20% t 13-71 1ll2T GRUMMAN LLV 88 DUAL CNG RH j 12 20% I1/2T GRUMMAN LLV E9 OIlAl CNG RH. I 17 , --,-3°K RH i 20%

j 8 i 15% I I .rnu I 16-01 i 1T GMC 96 DSL 12 , ~~~~r, 16-10 ilT CHEV PARCEL DEL 63 6 /15% 16-l 1 11T CHEV PARCEL DEL 83 CA 8 15% 16-12 /IT FORDVAN 6 15% 16-20 1IT DODGE VAN WAGON 83 8 15% 16-21 1T DODGE VAN WAGON 63CA ! 6 15% 16-22 1T DODGE VAN WAGON 84 I 8 15% 16-32 1T CHEV. PARCEL DEL 83 DSL 8 15% 1640 ,lT AMG 76 LHD 6 5% 16-50 OTHER 1TVEHlCLES 8 5% 16-51 j 1T FORD AEROSTAR PRC.DEL 66 CA 6 15% 16-81 !IT DODGE 80 CA i 6 15% 16-82 ! 1T DODGE 80 / 8 15% I

- ._._,_ ..- .-.- 21-m I2T GMC 96 DSL ~ 12 / 5% 21-30 :2TAlRSTREAM 75 LH 7 / 5% ,140 i2 li2T CHEV.PRC.DEL 84 DSL : 12 I 15% !141 li2T CHEV.PRC.DEL 64 CA DSL i 12 i 15%

.-. _.- - .- LINCK t), uiD. CNG 5%

&TON CARGO VAN 2640 5T FORD CARGO VAN 75 COE 8 5%

Page 2 AITACHMENT MM-VEH OCWJSPS-TG-16 Page 27 of 35

26-41 5T FORD CARGO VAN 75 COE CA a 5% 26-50 ,5T FORD CARGO VAN 75 CBE a ; 5% 2660 :OTHER 5T VEHICLES ,A 4% -- -- _- .^ -.--- . . _ I” .a IO m-10 :51 inr; C;AKU” “AN /a COE a 5% 26-71 :5T IHC CARGO VAN 76 COE CA a 5% 2640 i5T IHC CARGO VAN 64 COE DSL ~ 12 I 10% 26-82 ~5T IHC CARGO VAN 66 COE DSL ~ 12 I 10% 1 I r ,-To- ,N CARGO- - VAN 26-99 OTTIHC ARMORED IZARGO VAN a I 10% 27-02 !7l IHC CARGO VA?4 64 COE DSL 12 ; 10% 27-03 ~7-T IHC CARGO VAN 66 COE DS L 1 12 j 10% 27-70 / 7T VOLVO GM CARGO VAN 91 DSL I a 1 10% 27-72 j7T FORD CARGO VAN 92 DSL a 10% I ! g-TON CARGO VAN I 27-73 19T FORD CARGO VAN 96 DSL 6 110% 27-90 19T VOLVO GM CARGO VAN 91 DSL a I 10% 27-92 !9T FORD CARGO VAN 92 DSL a I 10% 27-99 19T CARGO VAN EMERY 5 5% I

1 32-21 TRC TA MACK 64 CA a 5% I

Page 3 AmACHMENT OCAnJSPS-T6-16 MM-VEH Page 26 of 35

34-30 iSPOT T 8 J INDUS 34-40 j SPOT CAP. OF TEXAS 67 DSL

Page 4 ATTACHMENT OCMJSPS-TG-16 MM-VEH Page 29 of 35

41-51 ,TRL STOUGHT‘ON 32x11’6 87 !I0 !5% _- --. __^^^ -- 41-60 ; I l-4. C”b-L” &xl 1’6 68 10 ; 5% 41-72 jTRL COPCO 36x11’6 75 10 5% 41-73 ~TRL BLACK DIAMOND 38x11’6 76 : 10 1 5% 41-74 iTRL BLACK DIAMOND 38x11’6 78 ~ 12 I 5% 41-75 /TRL copco 38x11’6 74 I ‘0 I 5% 41-76 ;TRL BLACK DIAMOND 38x11’6 80 I12 i5% 41-80 ;TRL STOUGHTON 38x11’6 a7 ! 12 I 5% 41-99 MOTHERMAIL HAULING TRAILERS j a I 5% I I I I I I TRAILER 12’ 8” I 3ASH 38x12’6 92 ; 12 I 5%

1’664 j 12 5% [ 43-53 ITRL MONON 45x12~6 a4 12 5% ITRL COPCO 38x12 i 17

TRL BLACK DIAMC

TRL MONON 38x12’6 75

/ MHICLE MAINTENANCE SERVICE LI 5ga(L ‘vu.I., n,“I I-MC“I.” ” .v I” 69-01I VMOIFLX 6 10% 59-02 VM PICK1JP. VAN 02 0 10% 59-10 VWI -----PRIOR _ TO_ 1991_ _ I3 10% 59-11 VWI TRAILER 8 10% 59-1: J VM 02 CNG a 10% i 59-1r i VM 02 FLX a 10%

Page 5 ATTACHMENT MM-VEH OCWJSPS-TB-16 Page 30 of 35

59-52 IVb.4TRANSPORT TRAILER,..-- 92 sR I ,nox._I_ 59-53 /VM TRANSPORT TRAILE ,R 94 I 10% 59-54 /VM TRANSPC--)RT --TRAILER ... - 95 8 110% 59-55 IVM TRANSkRT TRAILE R96 I 6 ~ 10% i 59-56 !VM TRANSPORT TRAILER 97 6 : 10% 59-57 ;VM TRANSPORT TRAILER 02 6 ilO% 59-56 :vM TRANSPORT TRAILER 99 8 ~ 10% 59-59 ‘VM TRANSPORT TRAILER 00 a / 10% 59-60 VM TRANSPORT TRAILER 01 6 10% 59-70 VM WRECKER 01 a : 10% 59-60 VM FLATBED WRECKER 01 a : 10% 59-61 VM WRECKER 02 a 10% 59-90 VM PICKUP. VAN 01 8 10%

PLANT SERVICE VEHICLES 6540 PLANT 01 CNG 0 10%

Page 6 ArrACHMENT 0cAlusPs-T6-16 MM-VEH Page 31 of 35

65-27 i PLANT PICKI 65-26 ; PLANT PICKI 65-29 ,PLANT PICK1 65-30 ~PLANT MINI I 65-^’ . ..- ...... 65-33 !PLANT 65-34 ~PLANT MINI F 65-35 ; PLANT . .‘. ” - 65-36 iPLANT MINI PICKUP 9 65-37 j PLANT 65-36 1PLANT 65-39 i PLANT MINI F -- _- ,^. . ..- . . . .

65-59 PLANT STAKEBED 00 a 10%

Page 7 ATTACHMENT MM-VEH OCAJUSPS-TS16 Page 32 of 35

ANT MINIVAN 91 8 I 10% 4NT MINIVAN 92 a 10% 1 65dZ rlANT MINIVAN 93 a 10% 4NT MINIVAN 94 a I 10% t-E=4 PLANT MINIVAN 95 0 ~ 10% 65-65 PL,-~ 4NT MINIVAN 96 a , 10% 65.66 ,PL,4NT MINIVAN 97 8 I 10% 65-67 PU JNT MINIVAN 9.5 0 110% 6568 :PU 4NT MINIVAN 99 ) 0 I 10% 65-6!-a ipLANT‘-. MINIVAN 00 I a / 10% 65-70 ;PU 4NT MINIVAN 02 __ __ -. I 8 j 10% I-65-60 wANT PICKUP l/2-3/4-1 T 01 a 1 10% 65-81 :PlANT PICKUP l&3/4-1 T 02 I a j 10% 65-85 ;PLANT MINI PICKUP 01 a ! 10% 65-86 iPLANT MINI PICKUP 02 I a / 10% 65-90 1PLANT VAN 1/2-3/4-l T 01 I6 110% 65-91 1PLANT VAN 112-314-l T 02 a j 10% 65-95 !PLANT STAKEBED 01 8 j 10% 65-96 : PLANT STAKEBED 02 : 8 j 10% I I ! ! ADMINISTRATIVE I #ADMN 98 Fu( i 8 / 10% IMN 99 FLX ! a 10% ‘ADMN 00 FLX a 10% iADMN 01 FLX a 10% AN 02 FLX I 6 10% dN PRIOR TO 1991 8 15% IN COMPACT 91 I a. 10% ~ADMNCOMPACT 92 ! a 10% 1N COMPACT93 0 110% 1N COMPACT 94 0 i 10% 1N COMPACT 95 a ~ 10% IPACT 96 6 !lO% [ 66-26 :ADMN COMPACT 97 8 [lo% 66-27 lADMNC-:OMPACT 98 6 I 10% IN COMPACT 99 8 ilO% ;ADMN COMPACT 00 a i 10% 66-30 :ADMN MIDSIZE 91 8 ! 10% IN MIDSIZE 92 0 10% ilZE 93 6 10% ,ADMN MIDSIZE 94 6 10% #SIZE95 6 10% IN MIDSIZE 96 a 10% IN MIDSIZE 97 a 10% ADMN MIDSIZE 90 a 10% 66-38 ADMIN MIDSIZE 99 a 10% ADMN MIDSIZE 00 a 10% NIVAN 91 0 10%

Page a ATTACHMENT MM-VEH OCrwSPS-TG-16 Page 33 of 35

/ I BUS I 67-10 :lHC BUS 6 : 10% I 1 INSPECTION SERVCE 76-01 INSP 02 FLX 6, 10% 76-02 INSP 02 CNG 6 10% 76-03 INSP 99 FLX 6 10% 76-04 INSP 99 CNG a 10% 76-05 INSP 00 FLX 6 10% 76-06 INSP 00 CNG a 10% 76-07 INSP 01 FLX a 10% 76-08 INSP 01 CNG a 10%

Page 9 ATTACHMENT MM-VEH OCMJSPS-TG-16 Page 34 of 35

Page 10 AtiACHMENT MM-VEH OCA/USPS-TG-~6 Page 35 of 35

99-10 STORAGE 7 5% 99-20 .NON-ROAD USE STORAGE TRAILER (TEMP. 12 5% ; STORAGE ONLY) 99-90 ISOLD a i 5%

Page 11 RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCA/tJSPS-T6-14. The Postal Service has presented information in speeches by its senior management on the need for investment to control costs, improve service, etc. Please also refer to your testimony at page 46, lines 4-13. In particular please focus on the sentence in line 7, ‘This is a stopgap measure.” What is the overall level of additional needed investment? ii/ Is there a plan for achieving this needed level of investment? C What will be the effect on the quality of service if this level of investment is not achieved?

RESPONSE:

(a-c) As indicated in my response to OCAAJSPS-TG-12, a revised capital plan beyond FY 2002 has not been developed. Also, please see my response to OCAAJSPS-TG-9 (a) and (c) for discussion of service relative to capital investments. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCAAJSPS-T6-15. Please refer to your testimony at page 46, lines 4-13. On the assumption that there is an unmet need for additional capital investment, please provide information in current year and constant year dollars for end of year real capital stock by the following asset types for the years 1990-present: land, buildings, vehicles, customer service equipment, postal support equipment, mechanized processing equipment, automated processing equipment. (4 Does this level equal the optimal level of capital stock needed for customer service?. (4 If the answer to question (a) is negative, what is the impact on customer service? (e) If the answer to question (a) is negative, what is the impact on operating costs? (f1 Do you have any studies related to the overall need for additional investments? RESPONSE:

This information in constant year dollars is provided in the categories requested with the exception of “mechanized processing equipment” and “automated processing equipment” which is combined under the category of “mail processing equipment” as follows: 1997-l 999 R2001-1, Chapter XII, LR J-50 1997-2000 R2000-1, Chapter XIII, LR l-27

1995-l 996 R1997-1, Chapter XIII, LR H-12 1992-1993 R1994-1, Exhibit E-8, testimony of John Ward For the years 1990, 1991 and 1994, the requested information in constant dollars can be extracted from the accounting period 14 Trial Balance for these years that are on file with the Postal Rate Commission.

(4 Based on the assumption included in the question “that there is an unmet need for additional capital investment,” I would assume that the level of capital stock would not be at the optimal level needed for customer service.

(W Please see my response to OCA/USPS T6-9 (a) for relationships between capital investments and service. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCbVUSPS-TG-15. CONTINUED.

(c) We have not identified the optimum level of capital investment for customer service, accordingly, we have likewise not quantified the impact on operating costs related to different levels of capital investments.

(d) There are no current studies that I am aware of relating to the overall need for additional investments RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCARISPS-TG-16. Please refer to your testimony at page 44, line 18 to page 45, line 15, discussing depreciation. (4 Please provide the rates of depreciation, by asset class, that the Postal Service applies to its capital stock. 0.4 Does the Postal Service have any studies that indicate that the performance of the equipment degrades proportionally with the depreciation? If so, please provide them. (4 Does the Postal Service have any studies that show how maintenance costs for equipment are related to the age of the equipment? If so, please provide them.

RESPONSE:

(4 See the attachment. (b No. (c) No. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCANSPS-TG-17. Please refer to your testimony at page 20, Table 14 that presents workyear mix. Why does the clerk overtime ratio remain constant during and after FY2001? It: Why does the casual percentage remain constant for clerks, city carriers, and mail handlers throughout the table? C. Why does the transitional usage increase for clerks and decrease for city carriers in Table 14?

RESPONSE:

(4 Please refer to page 19 of my testimony. On line 13, I state that “overtime is based on the FY 2001 operating plan.” I further state on line 17 that “the clerk overtime ratio is assumed to continue at the FY 2000 level for FY 2001, as reflected in the FY 2001 operating plan, and then remain at that level through the test year.” This is a reasonable assumption in view of the fact that overtime assumptions made in conjunction with operating plan development were not available for FYs 02 and 03.

0.3 Please refer to page 19 of my testimony. On line 27, I state that “casuals are assumed to continue to be utilized at the same level experienced in FY 00 for all years through the test year.” This is a reasonable assumption in view of the fact that casual assumptions made in conjunction with operating plan development were not available for FYs 02 and 03.

(4 Please refer to page 19 of my testimony. On lines 19-27, I state that “clerk transitional employee (TE) workyears for FY 2001 reflect actual data through Accounting Period 9. and are assumed to be little changed from FY 2000, based on year-to-date FY 2001 actual paid employee experience. Clerk TE workyears are assumed to remain at the FY 2001 level through the test year. FY 2001 city carrier transitional employee workyears are also based on actual data through Accounting Period 9 of FY 2001, and are assumed to decline from the FY 2000 level based on FY 2001 actual paid employee data. City carrier TEs are assumed to continue to decline in FYs 2002 and 2003 at the same rate of decline experienced in FY 2001.” These are reasonable assumptions in view of the fact that TE assumptions made in conjunction with operating plan development were not available for FYs 02 and 03. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

Please refer to Chapter VIII of Library Reference J-50 for additional information and calculations related to the mix of base workyears (career, casual, and transitional), and overtime workyears. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCAIUSPS-T6-16. Please refer to your testimony at page 42, line 33, which references Standard & Poor’s DRI publications. Please provide the following information. (a) Please identify the publication from which information is used by name, date, page number, etc. If you used more than one edition of the publication, please identify which edition(s) apply to the various portions of your testimony. (b) Please provide copies of the relevant Standard & Poor’s publication tables, graphs, text, and briefinq/summary charts that underlie the numbers used in your testimony regarding the budget and the contingency amount.

RESPONSE: a. The indices referenced on page 42 of my testimony relate to workers’ compensation only. Please refer to Exhibit USPS-8.S for the names of the publications from which these indices were taken. The publications containing the data for 1996 2000 are available in the U.S. Postal Service Library. The publications contatining earlier data are no longer maintained in the Library, although they may be available from DRIMIEFA. b. The DRIMIEFA indices used to calculate and support the revenue requirement are referenced on page 23 of my testimony and in Exhibit 6T. As stated on page 23 line 28 of my testimony, a detailed list of the indices used can be found in Chapter IV of Library Reference J-50. The annual indices were developed on a Fiscal Year basis specifically for the Postal Service and were not taken from a DRlMlEFA publication. The forecasts used by DRl/WEFA to develop the indices used by the Postal Service are referenced in my testimony (USSIMKONTROL 0801 and CISSIM/TRENDLONG 0501). RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCAIUSPS-TG-19. Please refer to your testimony at page 45 line, 29 and page 47, line 3. The word “reasonable” is used in referring to the proposed contingency. You also note that the Postal Service has a strong productivity performance, has aggressive cost savings programs, and continues to limit capital spending, at page 47, lines 11-13. (a) On what basis is it concluded the Postal Service’s productivity performance is strong - e.g. how is performance measured, and what is the standard of benchmarking the performance of comparable organizations. Please provide the measurements. W On what basis is it concluded that the Postal Service’s cost savings programs are aggressive e.g. how are the cost savings programs measured to determine that they are aggressive and what is the standard of benchmarking the cost savings programs against that of comparable organizations. (a In view of these Postal Service efforts, what is the justification for the Postal Service request for a contingency of three percent that is higher than in previous cases?

RESPONSE: With regard to the predicate for your questions, my testimony does not merely say that a 3 percent contingency provision is reasonable. It also says this is the minimum amount necessary to address the inherent uncertainties relating to the Postal Service’s projected financial status in the test year.

(a) With regard to the measurement part of your question, productivity performance is typically measured in terms of ratios of outputs to inputs, and changes in productivity performance are typically referenced in terms of percent changes in those ratios. An increase in ratios over time indicates increasing productivity and a decrease in ratios over time indicates decreasing productivity. The strong productivity performance in FYs 2000 and 2001 referenced at page 47 of my testimony is documented by Exhibit USPS-GT, which displays 2.5 percent total factor productivity growth in FY 2000 and 2.0 percent estimated end-of-year growth in FY 2001. These productivity growth rates are among the strongest ever experienced by the Postal Service, are substantially greater than the long-term trend in private non-farm, multi-factor productivity growth and are reflected in the RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

revenue requirement. The revenue requirement would be greater by approximately $3 billion if it were not for the productivity improvement in FYs 2000 and 2001.

With regard to the benchmarking part of your question, I do not believe there are comparable organizations to the United States Postal Service (my discussion of the contingency provision identifies a number of attributes of the Postal Service that make it unique). Further, it has been my experience that other organizations rarely, if ever, publish comparable productivity data. Therefore, I am unable to supply information responsive to the second part of your question because I do not believe such information exists and the Postal Service has no such information.

(b) With regard to the measurement part of this question, cost savings programs are measured by dollar amounts. As is stated at page 17 of my testimony, the net cost savings included in this rate case total $2.8 billion. These net cost savings are included in the revenue requirement. If it were not for these net cost savings, the revenue requirement would be greater by $2.6 billion dollars, and would result in rate increases that are half again as large as those proposed (i.e., an average rate increase of approximately 13 percent). My assessment that these savings are aggressive is based primarily on the benefit of these savings to customers and on my six years of experience as Manager of Budget and Financial Analysis, which involves budgeting for cost savings programs.

With regard to the part of your question on benchmarking, as mentioned above I do not believe there are comparable organizations to the United States Postal Service. Further I am not aware of other organizations that regularly publish comprehensive information on cost savings programs. Therefore, I am unable to supply information responsive to the second part of your question because I do not believe such information exists and the Postal Service has no such information. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

(c) I do not agree that the 3 percent contingency provision is higher than in previous cases. It is in fact equal to or lower than the contingency provision proposed in 7 out of the 11 previous omnibus rate cases. It is also only 0.5 percentage points greater than the 2.5 percent contingency provision that proved to be inadequate in the recently completed Docket No. R2000-1 rate case. Further, going into the test year in this rate case the Postal Service will be in a much weaker financial position than in Docket No. R2000-1. The 3 percent contingency represents the Board’s and management’s assessment of the Postal Service’s exposure to financial risks and its willingness and ability to absorb those risks-prior to September 11, 2001- as is explained throughout the contingency section in my testimony.

Concerning the requested justification, the cost savings programs and strong productivity improvements I reference do not reduce financial risk or enhance the Postal Service’s ability to absorb that risk. As I noted above, these efforts are built into the Postal Service’s revenue requirement and therefore have reduced the revenue requirement from what it otherwise would be. t would therefore seem odd to cite them as a basis for lowering the contingency, as is seemingly implied by the question. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCA/USPS-TG-20. Please refer to your testimony at page 48, lines 14-l 5 where you state that the Postal Service does not control its rates and fees. (4 Please confirm that the current case does, in fact, have an impact on rates and fees, and that the Board of Governors will receive a decision from the Postal Rate Commission. W Please confirm that the Postal Service has an opportunity to update filings reflecting experience following the filing of a case and adjustments for known or knowable cost changes. (c) Please confirm that the 78.7 percent of total expenses related to labor, that you delineate on page 49, line 4 of your testimony are known in terms of current wage rates, and as estimates of future wage rates (subject, however, to arbitration). (d) Please confirm that,the 78.7 percent of total expenses related to labor can be affected by the amount of labor used and is possibly open to change from the implementation of innovative techniques, such as changes in materials requirements planning, robotics, electronic data interchange, improved scheduled, enterprise resource planning, and computerization. 03 Does the Postal Service have information on how implementation of such techniques referred to in part (d), above, has affected productivity in other industries?

RESPONSE:

(a) Not confirmed. It will not be known whether and to what extent the current case will have an impact on rates and fees unless and until there is a recommended decision returned by the Postal Rate Commission that is acted upon by the Postal Service’s Governors. In this connection, I understand that the statute expressly contemplates that the Postal Rate Commission may fail to return a recommended decision within the prescribed ten-month period. I also understand that the statute provides for extension of that ten-month period under certain circumstances. These are uncertainties and risks that I did not specifically mention in my testimony, but which could be added to the list if more specificity were desired.

(b) Confirmed that the Postal Rate Commission has in the past ordered updates and testimony to be filed that indicated higher costs than assumed in the original filing. However, the Commission has resisted increasing the revenue requirement based on RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE such information, meaning that the Postal Service may not receive financial relief as a result of such testimony being filed. In Docket No. R2000-1, for example, three recommended decisions and the Governors’ modification decision were required before the Postal Service could gain the benefit of updated cost data (and by the time rates were implemented in July, 2001, the updated cost data were over a year old).

(c) Confirmed that FY 2000 labor expenses are known. I cannot confirm that estimates of future estimates of wages are known. By virtue of being estimates these future wages are unknown.

(d) I can confirm that labor expenses are affected by the factors listed in the question, but would suggest they are more affected by wage rates, cost levels and benefit expenses than by the listed factors. Both the factors listed in your question and the additional factors that I have cited are subject to considerable uncertainty.

(e) I am not aware of any such listing and the Postal Service has no such listing. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

OCANSPS-TG-21. Please refer to your testimony at page 54 line 27. You state that the dollar may weaken, a conclusion apparently tied to the sad tragedy of September 11. Further information on the impact of postal costs is needed. (4 A “weak” dollar (explicitly, the exchange rate moving so as to require more dollars to buy a peso, pound sterling or other currency) ceteris paribus means that U.S. exports are less expensive, providing economic stimulation. Would this not result in a favorable impact on the economy, thereby stimulating the demand for Postal Services? (b) On page 54 lines 22-26 of your testimony, you cite the recent terrorist attack on the World Trade Center. Dealing only with the economic relationships as noted by experience with no implied value judgement, economic textbooks indicate that military expenditures have stimulated the economy. Accordingly, what economic logic leads to the prediction of increased economic slowdown?

RESPONSE:

(a) Your question ignores the fact that imports become more expensive when the dollar weakens, meaning that consumers spend more for imported goods and inflation accelerates. Increased inflation negatively impacts postal finances.

Please note that I addressed the export issue at page 54 of my testimony where it is stated, “[l]n the end there are not lifelines for the U.S. economy from the rest of the world.” This is because much of the remainder of the industrialized world is in a cyclical slump. So, rather than retying on export growth, the passage at page 54 of my testimony says that continued United States economic growth would depend on “keeping consumer spending buoyant.” The likelihood that export lifelines will not be available to the U.S. economy afloat, is reinforced by DRI-WEFA’s October release, quoted in part (b) below, which states that a global recession is now ‘inevitable.”

08 I do not understand that economic textbooks indicate that military spending is better than other types of spending. RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE

Martin Baily, past chairman of the Council of Economic Advisors, apparently disagrees in the current situation with the hypothesis stated in your question. He reports as follows: There is broad agreement that the terrorist attack will push the US economy into recession and the global economy into a period of slow growth.

“Economic Policy Following the Terrorist Attacks,’ Economic Policy Briefs Number Ol- 10, Institute for International Economics, October 2001, p.2.

DRI-WEFA’s confidence in the prospects for economic growth has also been shaken. Prior to the September 11 terrorist attacks on the United Sates, there was a slightly better than 50/50 chance that the U.S. economy and the rest of the world could avoid a recession. The fallout from the attacks now makes U.S. and global recessions inevitable.

“Post-Attack World Economic Prospects: A Deeper Recession and a Faster Recovery,” DRI-WEFA, October 12,2001, p. 1.

In the new DRI-WEFA forecasts, the faster recovery does not fully compensate for the deeper recession. DRI-WEFA projects less economic growth through the test year as a result of the terrorist attacks, and specifically notes that growth in consumer spending and the resilient service sectors were badly damaged by the terrorist attacks. This lower level of economic activity would tend to reduce the Postal Service’s volume and revenue below that projected in the rate filing.

In the current economic situation there are significant new risks and real indications of sharpslowdowns in consumer spending, construction and business investment. There are already hundreds of thousands of people who have been furloughed or laid off, or have had their hours worked significantly reduced in the travel, transportation and tourism industries. Increases in unemployment reverberate throughout the economy. It RESPONSE OF UNITED STATES POSTAL SERVICE WITNESS TAYMAN TO INTERROGATORIES OF THE OFFICE OF THE CONSUMER ADVOCATE would take rather extraordinary increases in military spending, including enormous increases in personnel hired to provide and support national defense to compensate for these impacts on the civilian workforce and to restore rattled consumer confidence. Your question makes no reference to the negative impacts.

I know of no economic textbook that says that a country’s being attacked and being subject to attack is good for the economy of that country. Attacks and fears of attack rattle confidence and divert scarce resources into non-productive security expenditures. Increased defense and security expenditures, by crowding out productivity enhancing investment and research, can slow economic growth and induce higher inflation. These risks are real. In addition, recent uses of mail as an agent for distributing anthrax spores directly affect the Postal Service. We can be hopeful that fear induced by this activity will not have any long-term impact on Postal Service volume and revenue. But the stark reality may not justify this hope. DECLARATION

I, William P. Tayman, declare under penalty of perjury that the foregoing answers are true and correct, to the best of my knowledge, information, and belief.

Dated: ,[email protected] CERTIFICATE OF SERVICE

I hereby certify that I have this day sewed the foregoing document upon all participants of record in this proceeding in accordance with section 12 of the Rules of Practice.

Scott L. Reiter

475 L’Enfant Plaza West, SW. Washington, DC. 20260-l 137 October 17,200l